In the aftermath of the most recent rate hike taking rates to 3.35%, the question has to be asked as to what they (the Reserve Bank Board – RBA) are thinking. This rise is number nine in ten months and has been the quickest tightening since the 1980’s. Add 2 to 2.5% to the cash rate and this is the rate circa 6% that retail banks are now selling to their customers on variable rates.
What is surprising of course is the speed and ferocity of the rate hikes as illustrated by the diagram below. Its almost vertical like a rocket launch.
Why are they doing it? The RBA was spooked by the December inflation figure for Australia at 7.8% and are now pulling out the stops. The problem is that they have already been pulling out the stops via previous rate hikes but not giving these rate hikes much time to flow through. Generally, a rate hike takes three months to actually flow through to a consumer’s home loan repayment. So the householder with a mortgage has another three months of rate rises to look forward to!
Also, we need to bear in mind that Australian household mortgages are substantially higher than US mortgages i.e. the average debt balance is some 40% higher. Further, 95% of US mortgages are fixed for 30 years whereas Australian home loans are generally fixed for only from two to three years. In fact, 40% of the Australian mortgages are fixed currently with the majority of that 40% maturing this year. This is the mortgage “cliff” that commentators are referring to. Mortgagee Homeowners who have a fixed rate maturing will be paying two to three times their monthly payment. To give you an example, the average mortgage is $500,000 and the repayments on that mortgage have increased by $1,000 per month since last April.
On the downside the rate hikes are definitely slowing the economy. Café and coffee sales are already falling as householders tighten their belts. Retail sales are falling, new car sales are falling, housing is weakening, and business and consumer sentiment is falling.
We may well be reaching the peak of rates, although I believe they will hold rates higher for longer and will not be in a rush to reduce them anytime soon this year. The RBA’s problem is while they are administering the medicine, they do not cause the patient (the economy) to seizure (recession) or worse case kill the patient (depression). This is more art than science and interest rates are a very blunt tool.
As we know from investor and consumer behaviours there is a very thin line between “greed” and “fear”. We have seen the greed, let’s hope we don’t see the fear.