The Reserve Bank has put homeowners on notice that they face further interest rate increases in the new year if inflation continues to rise and spending remains unchecked over the holiday period.
The bank’s final meeting minutes for 2022 reveal it is on a mission to lower inflation amid concerns about higher spending over summer holidays without Covid restrictions.
The news was just as bad for renters too, with the central bank forecasting “further large increases in rents” over the next few years, in what is already a “tight” market.
The bank chose to raise interest rates by another 25 basis points this month, despite considering a 50 basis point rise, bringing the overnight cash rate to 3.1%. But it has warned that, in the new year, if inflation was not heading down, and substantially so, higher interest rates would continue to be used to put a brake on spending.
The December minutes, released on Tuesday, show there are signs people are feeling the impacts. The recent Black Friday retail sales were reported as “mixed” with consumers choosing less expensive stores.
Some retailers had expressed concern about the outlook for 2023, reflecting the effect of rising interest rates and cost-of-living pressures, together with weak consumer sentiment and the “wealth effect of declining housing prices”, the bank reported.
“These factors were also weighing on demand for new housing.”
But while the housing market had decreased, on average, 6% since interest rates began increasing in May, real estate remains well above its pre-pandemic levels. The rental market is still considered “tight” with the bank acknowledging this was fuelling CPI growth.
“A number of demand- and supply-side factors were contributing to the current tightness in the domestic rental market, with further large increases in rents expected over coming years as population growth picks up,” the bank’s board said in its minutes.
The board was told that homeowners with mortgages were continuing to add to their offset and redraw accounts, although at a slower rate than during the pandemic when spending was constrained by lockdowns and border closures.
Those buffer accounts will be needed in the coming year when people roll off their fixed interest rates and into the new interest rate landscape, which will see their repayments increase by more than $850 a month for a $500,000 loan and more than $1,000 a month for a $750,000 loan.
“Taking into account the increase in mortgage rates implied by financial market pricing for the cash rate and the roll off of fixed-rate loans, required mortgage payments relative to income were expected to increase in 2023 to be equal to their previous peak in 2008,” the board reported.
“As a share of income, expected required payments in 2023 would also be close to the average level of actual mortgage payments – both required and excess mortgage payments – in 2022.”
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But with the board not seeing the inflation drop off it wants, it “expects to increase interest rates further over the period ahead”. It’s not a “pre-set path” and the size and timing of any interest rate hikes will depend on the inflation outlook and what’s happening in the labour market.
Part of the issue, though, is that the outlook is unclear.
“While household spending was expected to slow over the period ahead, the timing and extent of this slowdown was uncertain,” the board reported. “Another source of uncertainty was the outlook for the global economy, which had deteriorated.
“The board is seeking to keep the economy on an even keel as it returns inflation to target, but these uncertainties mean that there are a range of potential scenarios. Members agreed that the path to achieving the needed decline in inflation and achieving a soft landing for the economy remained a narrow one.”
Large interest rate increases are not being ruled out “if the situation warranted” but if things had cooled down, the bank also said it could leave the cash rate “unchanged for a period”. But it did not make any mention of lowering it.
“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”