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Our CEO caught up with Kylie and Matt of 1494 2AY to discuss the Reserve Bank of Australia’s decision to raise interest rates.
Kylie opens the chat by commenting that there probably weren’t too many people surprised by the decision.
Stephen agrees, commenting that the honeymoon period of the new RBA Governor is perhaps over, following several months of rate pauses.
He says the majority of economists predicted the move after the latest inflation data and other economic indicators came in above expectations.
Matt comments that the RBA Governor mentioned in Tuesday’s decision that although inflation has passed its peak, it’s still too high. He asks Stephen if this would’ve been the main factor behind the rate rise.
Stephen says it was one of several factors. Noting high inflation was certainly the main talking point on Tuesday.
He then refers to the latest data released which showed inflation at 5.4% annually. Down from the 7.8% high – but still well above the RBA’s band of 2% to 3%.
He says no one can deny that inflation is hurting people, and this is also impacting confidence levels. The latest Consumer Confidence Index issued by Westpac is down to a figure close to its worst level since the pandemic in 2020.
Stephen says this shows we now have a sustained weakness in consumer sentiment, which isn’t good for anyone.
Kylie adds that the drop in confidence must be coming from a pretty blunt measure in rate rises to shift the economy. She then asks when is there a tipping point for those mortgage holders?
Stephen responds that many would argue that we’re already there, given there’s been 13 rate rises in the past 18 months.
He says what is still concerning is that the full impact of those rate rises has not been fully felt, as there are still around $175b in mortgages on low fixed interest rates.
He points out that when these start to roll off onto higher rates, which are now expected to be close to three times higher, we’ll see households start to tap into reserves – because they’ve virtually been sheltered from the rate rises for the past 18 months.
Matt asks Stephen if what he is saying is that spending may not drop first, but it’s household savings that may continue to decrease as those on fixed mortgages roll off.
Which Stephen says is exactly right, stating we just need to look at the US who are a few months ahead of us. Their savings levels continued to run off as interest rates remained elevated – and we should prepare for the same to play out here.
He continues to say this is the danger the RBA is potentially putting us in. With many households building up solid savings during Covid (over $200b) creating a buffer in the event of rising costs. But he points out those buffers won’t last forever.
So, the RBA is looking for the economy to slow in spending, but where things may slow is household savings and reserves.
He adds, the RBA’s own research indicated that if interest rate hikes were passed on in full, 15% of households would have negative cashflow. And that was if rates rose to 3.6%. We’re now at 4.35%.
So, he says, something will have to give. Either households adjust spending levels, or they simply use up savings.
As to whether we can expect another rate rise next month?
Stephen says it’s difficult to say, it’ll clearly depend on the latest economic data, but irrespective, he says we’re all hoping for a pause.