A Reserve Bank official has admitted they’ve done a ‘terrible job’ in trying to curb Australia’s runaway inflation rate.
After a record 10 consecutive rate rises, the RBA left the cash rate on hold at an 11-year high of 3.6 per cent, having risen from a historic low of 0.1 per cent, to gauge whether the rises have put the brakes on inflation.
But the rate rises from May 2022 to March 2023 failed to have the expected impact on inflation, which was 6.8 per cent in the year to the end of February.
‘With the benefit of hindsight… it looks like we did a terrible job,’ Ian Harper, an RBA board member since 2016, told a panel in Melbourne on Wednesday.
As Australia’s economy recovered from the Covid-19 pandemic and inflation shot up, the RBA raised interest rates month after month in an effort to slow spending.
Reserve Bank of Australia executive Ian Harper (pictured) has made a shocking admission, saying the organisation’s so far failed efforts to curb inflation have been ‘a terrible job’
The economic theory is that if people have to spend more on mortgage repayments, they have less to spend on other items and so inflation will fall.
But it hasn’t worked to plan; inflation has fallen from a 32-year high of 7.8 per cent in 2022 to below 7 per cent today, but it is not falling fast enough.
RBA officials on Wednesday admitted the bank had been ‘excessively cautious’ in dealing with a post-pandemic economy and said its public messaging was poor.
‘When you look backwards, often times you see things much more clearly than you do at the time,’ Mr Harper said, according to The Australian.
He said trying to stabilise Australia’s financial system and trying to keep inflation within its 2-3 per cent target ‘led us to be extremely cautious’.
‘With hindsight, excessively cautious in how we set interest rates during that time.’
Michele Bullock, the RBA’s deputy governor, said slashing the cash rate during the pandemic to deal with the huge economic shock was the right thing to do, but the bank’s messaging had been ‘garbled’.
In 2021, RBA officials said the bank did not expect rates to rise for ‘at least three years’, not until ‘2024 or later’.
Many borrowers took this as a certainty that rates would stay low and borrowed more than they otherwise might have, leading to severe mortgage stress for some as rates have since last May to try to turn inflation around.
After 10 consecutive rate rises, the RBA (pictured) this month left the cash rate on hold at an 11-year high of 3.6 per cent, having risen from a historic low of 0.1 per cent
Last November, RBA governor Philip Lowe apologised to those who took out too much debt based on the bank’s expectation that rates would not rise for three years.
Ms Bullock said the RBA’s expectation on rates staying low was not ‘unconditional’.
‘The message got garbled. People latch on to a date … and even now that we are raising interest rates, they still want us to put a date on when we are going to stop doing it,’ she said.
‘We should have resisted … a little bit more there.’
There is more pain to come for Australian borrowers, who are now facing a 65 per cent surge in their monthly mortgage rates as ultra-low fixed rates begin to expire – with the RBA worried.
With inflation still well above its 2 to 3 per cent target, the Commonwealth Bank and Westpac are expecting one more rate rise that would take it to 3.85 per cent by May.
But the ANZ is expecting that rate rise to be delayed until August.
Ultra-low fixed mortgage rates, below 2 per cent, are set to expire in coming months, which would see borrowers abruptly forced on to much higher ‘revert’ variable rates – which may get as high as 7.18 per cent, should there be one more RBA rate rise.
A borrower with an average $600,000 mortgage would see their monthly repayments surge by 65 per cent to $4,163 – up from $2,518 – if they didn’t refinance, RateCity calculated.
Variable rate borrowers since May last year have seen their monthly repayments climb by 48 per cent to $3,415 – up from $2,306 when the RBA cash rate was still at a record-low of 0.1 per cent.
This has occurred as a Commonwealth Bank lending rate, for those with a minimum 20 per cent deposit, soared to 5.52 per cent, up from 2.29 per cent.
While variable rate borrowers have seen their budgets get squeezed, the RBA’s Financial Stability Review for April was more concerned about the 880,000 fixed-rate borrowers whose ultra-low rates expire in 2023.
‘On some metrics fixed-rate loans appear a little riskier than variable-rate loans,’ it said .
‘Borrowers on fixed rates tend to have larger balances relative to borrower incomes and higher loan-to-valuation ratios than variable-rate loans.’
The Reserve Bank of Australia said that fixed rate borrowers also had ‘less time to accumulate equity or liquidity buffers’.
‘Some borrowers on fixed rates could be at higher risk of entering financial stress when their mortgage payments increase,’ it said.
The Reserve Bank calculated that 14 per cent of borrowers would deplete their savings by mid-2024 without cutting back on their ‘non-essential’ spending.
But 9 per cent of borrowers would exhaust their savings regardless ‘even if they reduced their non-essential spending by ‘relatively extreme amounts’ – or by 40 to 80 per cent.
Australia’s is suffering from the worst cost of living crisis since 1990.
