Reserve Bank of Australia governor Michele Bullock has warned some homeowners may have to sell their homes to stay afloat as she delivered her own economic warning.
Bullock said that if inflation remained above the target range, a proportion of borrowers would be at risk.
“While the numbers are not large enough to pose a material risk to the stability of the financial system, it would have a material impact on those households who end up in this situation,” she said.
Bullock reiterated that talk of rate relief was premature, effectively ruling out a pre-Christmas cut.
“Circumstances may change, of course … but if the economy evolves broadly as anticipated, the board does not expect that it will be in a position to cut rates in the near term,” she said.
Bullock pushes back
In a week that has seen Treasurer Jim Chalmers take potshots at the RBA for its monetary policy, Bullock stood by the central bank’s interest rate settings, arguing that inflation pressures – particularly in the home construction sector, rents and insurance – continued to be high in some parts of the economy.
Earlier in the week Chalmers argued that interest rates had “smashed” the economy.
Rates are certainly having an impact.
Yesterday’s GDP figures revealed the economy had its worst growth performance since the 1990-91 recession (excluding the recent pandemic).
Annual growth was up just 1% for the June quarter. Household consumption grew by just 0.5% over the past year.
According to Bullock, the hardest hit are lower-income Australians who are over-represented among those struggling.
She said that the bank estimated approximately 5% of individuals with a variable-rate mortgage were already experiencing a "cash flow shortage," where their essential expenses and loan repayments exceeded their income.
“Although this group is fairly small overall, those in it have had to make quite painful adjustments to avoid falling behind on their mortgage repayments,” Bullock said.
“This includes things like cutting back on their spending to the more essential items, trading down to lower quality goods and services, dipping into their savings or working extra hours. Some may ultimately make the difficult decision to sell their homes.”
Younger Australians were also hard hit and may be finding it difficult to reduce spending by purchasing cheaper goods as they were likely to buy cheaper goods in the first instance.
She also noted this demographic had fewer savings to act as a financial buffer.
“Those with mortgages are feeling the squeeze on their cash flows not just from high inflation, but also from the increase in interest rates that has occurred in response to it,” she said.
“And as labour market conditions ease, more households will experience a strain on their finances from unemployment or reduced working hours.”
Policy remains unchanged
Despite the hardship felt by Australians, Bullock said the RBA remained committed to bringing inflation down to its target range of between 2% and 3%.
“We know the restrictive monetary policy settings that are necessary to bring inflation down are causing hardship to some households and businesses,” she said. “But inflation causes hardship too, for all Australians and particularly for the more vulnerable in our community.
“Our experience of how costly inflation can be is the reason that getting inflation back to the target range is our priority,” she said.
While inflation is some part of the economy is slowing, market services including electricity, insurance, warehousing and logistics costs, remain elevated and businesses continue to pass on higher costs.
“The key takeaway here is that domestic capacity pressures, in both housing and market services, are contributing to above-target inflation,” she said.
“Despite a gradual easing over the past 18 months, the labour market remains relatively tight, with labour availability still a constraint for some businesses and job vacancies elevated.”
Some money markets are predicting around a 70% chance of a cash rate cut at the RBA’s December meeting. However, most economists say the RBA’s preferred underlying inflation marker was still too high at 3.8%.