'There will be another shock'
Home buyers with big mortgages will be a weak spot in the economy once rates are lifted above record low levels, Reserve Bank governor Philip Lowe warned following the Commonwealth Bank’s second increase on fixed-rate mortgages in three weeks, raising the charges by up to 0.25%.
Lowe had earlier told a G20 meeting of central bank governors that the rises in interest rates across different countries were unlikely to be synchronised with differing rates of inflation but posed risks to economies with heavily indebted households.
“Rising interest rates on higher debt with higher asset prices – you can see the fault lines here,” he said. “We know from previous experience that when countries are on different paths in terms of interest rates, stresses do emerge in the global financial system.
“I think it’s quite possible, in fact probable, there will be stress points over the next couple of years. … We can’t be sure where the next shock will come from, but we can be sure there will be another shock,” Lowe added.
Australian households are among the most heavily indebted in the world, with household debt to disposable income ratio at 140.5%. But the recent drop in interest rates has reduced the ratio of interest payments to income down to an all-time low, the Sydney Morning Herald reported.
Meanwhile, consumer prices are rising at their fastest pace in over 10 years, leading to speculation interest rates will be increased in a matter of months. CommSec chief economist Craig James is expecting the first rise from the RBA in more than a decade to occur in June.
“While higher interest rates reduce pressure on interest margins for banks, Bendigo Bank noted fierce competition across most lending categories and continued strong consumer preferences for fixed-rate loans,” James said.
Rising interest rates would dramatically slow the housing market but are not expected to fully unwind the rapid price growth of the past two years. ANZ chief economist Richard Yetsenga said property values look “poised for a soft landing even as the RBA starts hiking rates.”
ANZ expects the RBA to increase rates in the third quarter of 2022, with 8% national median property price growth this year, followed by a 6% decline in 2023.
“[The] pressure on interest rates to rise is only going to increase over the next few years,” Prime Minister Scott Morrison warned. “The pressure on inflation is only going to increase and what Australia can’t afford is a Labor Party that doesn’t know how to manage money. That will see you pay more for everything.”
The government has run the two largest budget deficits on record, including $134.2 billion last financial year. It is not forecasting a return to surplus this decade, gross government debt having reached $866.2 billion last week, the Sydney Morning Herald reported.
