Finance Finance News ‘Rate rises will sting’: Warning for Aussie borrowers

‘Rate rises will sting’: Warning for Aussie borrowers

Treasurer announces details of RBA review

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Looming interest rate rises will sting many Australian households as economic conditions get worse before they get better, Treasurer Jim Chalmers has warned.

Dr Chalmers wants to use a review of the Reserve Bank of Australia to build back consumer confidence after this year’s string of interest rate hikes years earlier than predicted.

It was announced as RBA governor Philip Lowe echoed the Dr Chalmers’ warning to borrowers.

Dr Lowe acknowledged recent interest rate rises, with more to come, had been a shock to “some parts of the community” but said they were necessary.

“The mindset we have is one of steady interest rate increases now” to head off expectations of even higher inflation, Dr Lowe said in a Q&A after a speech to the Australian Strategic Business Forum on Wednesday.

“If that does not happen, then we will have trouble returning inflation to 2-3 per cent over any reasonable horizon,” Dr Lowe warned.

Earlier on Wednesday, Dr Chalmers confirmed details of the review of the Reserve Bank’s monetary policy and make-up of its board – the first in more than three decades.

“We want to build confidence in the Reserve Bank, and you build confidence in an institution by being prepared to refine it and reform it,” he said in Canberra.

“Interest rate rises hurt, we understand that.

“We want to make sure that when difficult decisions are taken by the independent Reserve Bank, they’re based on the best possible processes and the best possible arrangements.”

The review will also seek to understand why the RBA slashed interest rates to emergency levels before this year’s month-to-month hikes.

“I think Australians are finding it difficult to make room in their household budgets for rising interest rates at the same time as the other costs of other essentials have been going through the roof,” Dr Chalmers said.

“These interest rate rises will sting. Every dollar that a household spends in servicing their mortgage is a dollar they can’t spend on meeting some of the other skyrocketing costs of essentials.

On Tuesday, the ANZ Bank published grim predictions that the RBA would hike the official cash rate by another 2 percentage points by November.

That would take it to 3.35 per cent a year earlier than initially forecast – and lift average monthly variable home loan repayments by a further $650 in the next four months.

On Wednesday, the Commonwealth Bank – the nation’s largest lender – said it expected official rates of 2.6 per cent by the end of the year.

The bank’s economists forecast a 50 percentage point rate hike in August and September, before a pause in October and then a 25 percentage point increase in November.

“But money market traders are pricing in a 3.5 per cent cash rate by December, fuelling fears about a potential economic slowdown,” CommSec chief economist Craig James said.

Prime Minister Anthony Albanese acknowledged Australians faced more rate hikes, with inflation predicted to hit 7 per cent and economic pressures compounding.

“It’s going to be tough. We have real economic headwinds,” he told Melbourne radio 3AW on Wednesday.

“I recognise I’m in a privileged position but we do have to recognise … and never forget that people out there are really doing it tough at the moment.”

But Mr Albanese said four rate hikes by the end of the year were ” the more pessimistic end of the forecast”.

“The Reserve Bank will make its decisions based upon their assessment of where the economy is at. But they need to be careful they don’t overreach as well,” he said.

“Of course, the Reserve Bank declared a while ago, conceded the error, that interest rates would would stay the extraordinarily low levels … up to 2024 and that hasn’t been the case.

“They need to make sure that they get the assessment right but there are some circumstances that could not have been foreseen.”

Dr Chalmers said while some people had been able to build a buffer on their loans, others would do it tough as inflationary pressures and price hikes continued to bite.

“We certainly expect the real wage situation to be better next year than this year,” he said.

“But every credible forecaster or economic commentator expects things to be difficult in the near term.”

Professor Carolyn Wilkins, Professor Renee Fry-McKibbin and Dr Gordon de Brouwer have been appointed to examine the RBA’s monetary policy arrangements, including whether its 2-3 per cent inflation-targeting framework is appropriate.

The tenure of board member and business leader Mark Barnaba has also been extended by a year, putting it past the March 2023 reporting date of the review.

Mr Barnaba’s five-year term was due to end on August 30.

But Dr Chalmers also flagged possible changes on the RBA’s board.

“One of the things that I do want the review to look at is the breadth and depth of the expertise and experience that’s on the board,” he earlier told the ABC.

-with AAP