‘Rate hikes will sting’: warning for Australian borrowers

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The impending interest rate hike will sting many Australian households as economic conditions deteriorate before they improve, Treasurer Jim Chalmers has warned.

Dr Chalmers wants to use a Reserve Bank of Australia review to restore consumer confidence after this year’s round of interest rate hikes years earlier than expected.

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

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

“The mindset we have is one of steadily raising interest rates now” to head off expectations of even higher inflation, Dr Lowe said in a question-and-answer session after a speech delivered Wednesday to the Australian Strategic Business Forum.

“If that doesn’t happen, we will struggle to get inflation back to 2-3% over a reasonable horizon,” Dr Lowe warned.

Earlier on Wednesday, Dr Chalmers confirmed details of the Reserve Bank’s monetary policy review and the composition 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 and reform it,” he said in Canberra.

“Rising interest rates hurt, we understand that.

“We want to ensure that when tough decisions are made by the Independent Reserve Bank, they are based on the best possible processes and arrangements.”

The review will also seek to understand why the RBA cut interest rates to emergency levels ahead of this year’s monthly hikes.

“I think Australians are struggling to make room in their household budgets for rising interest rates as other costs for other essentials have soared,” Dr Chalmers said.

“These interest rate hikes are going to sting. Every dollar a household spends servicing their mortgage is a dollar they cannot spend on some of the other skyrocketing costs of basic necessities.

On Tuesday, ANZ Bank released grim predictions that the RBA would raise the official exchange rate by another 2 percentage points by November.

That would take it to 3.35% a year earlier than originally planned — and boost average monthly variable home loan repayments by another $650 over the next four months.

On Wednesday, the Commonwealth Bank – the country’s biggest lender – said it expected official rates of 2.6% by the end of the year.

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

“But money market traders are forecasting a cash rate of 3.5% by December, stoking fears of a potential economic slowdown,” said Craig James, chief economist at CommSec.

Prime Minister Anthony Albanese has acknowledged Australians face more rate hikes as inflation is expected to hit 7% and economic pressures worsen.

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

“I recognize that I am in a privileged position, but we have to recognize…and never forget that people are really tough right now.”

But Mr Albanese said four rate hikes by the end of the year was “the most pessimistic end to the forecast”.

“The Reserve Bank will make its decisions based on its assessment of the economic situation. But they have to be careful not to go overboard as well,” he said.

“Of course, the Reserve Bank said some time ago, conceded error, that interest rates would remain at extraordinarily low levels…until 2024 and that has not been the case.

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

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

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

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

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

Board member and business leader Mark Barnaba’s term has also been extended by a year, past the March 2023 review closing date.

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

But Dr Chalmers also flagged possible changes to the RBA board.

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

-with AAP

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