ANALYSIS
Struggling mortgage holders are staring down the real possibility that another interest rate hike – widely expected to come later this month – may bring more pain while delivering little additional progress on inflation.
The Reserve Bank has pointed to stubborn inflation as the reason for its run of rate increases, but there is a growing debate about how much extra impact further tightening would have on household spending from here.
Markets have tipped a 76 per cent chance of a rate hike in September, according to the latest ASX rates indicator. Were it to occur, it would be the fourth rise this year and would push the cash rate to a 15-year high.
This year’s hikes have already put intense pressure on borrowers who bought homes at the high prices seen after the pandemic began in 2020, yet inflation remains above the RBA’s 2 to 3 per cent target range.
The latest ABS figures showed underlying inflation over the year to July at 3.6 per cent, still well above the central bank’s target band.
RBA governor Michele Bullock (right) is widely expected to announce another rate hike this month.
Part of the challenge is that some of the strongest price pressures are in areas households find hard to cut back on quickly, including fuel, energy and rent.
There is also a broader question about how evenly higher rates affect the population. A substantial share of Aussies own their homes outright and do not face higher repayments when rates rise.
These households are often less directly exposed to higher interest rates than recent borrowers, and some may be earning more on savings as deposit rates increase.
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Polling by comparison group Finder found close to one in four Australian mortgage holders expected to be mortgage-free within the next five years.
Finder mortgage expert Richard Whitten said recent borrowers were generally under the most pressure.
“Interest rate hikes always disproportionately affect borrowers with bigger mortgages and people who’ve taken out loans more recently,” Mr Whitten said.
RBA rate hikes can drag on housing construction. Picture: Jonathan Ng
“Rate hikes actually benefit older Australians who’ve paid off their homes and have money in term deposits or high interest savings accounts.
“There’s a limit to the effectiveness of rate hikes as a tool for driving down inflation. There’s only so much pressure you can put on one segment of the population.
“However, rate hikes don’t just target consumer spending. Higher interest rates also drive up borrowing costs for businesses. This also has an impact on inflation.”
Earlier Primara Research findings suggested housing affordability had changed who carried the burden of higher rates over time.
Falling home ownership among younger Australians has meant fewer households are directly exposed to mortgage costs, while those who do have mortgages have often had to borrow more to enter the market.
The result, the research argued, is a smaller group of mortgage holders carrying a heavier share of the impact.
Finder mortgage expert Richard Whitten said rate hikes were hitting households disproportionately.
SQM Research director Louis Christopher has argued the softer-than-expected effect of past rate rises on inflation deserves closer scrutiny.
“The rate hikes that have already happened should have made an impact by now,” Mr Christopher said on X.
“Certainly we see with the housing price correction. But we need to honestly ask ourselves why hasn’t inflation come further down?
“This rate rise, should it occur, will be very painful indeed. I know now of many, many small businesses who are right on the edge of the abyss.”
HSBC chief economist Paul Bloxham said earlier this month there was a chance another rate rise this year could push the economy into recession.
“It is difficult to see how the RBA can stay near full employment and still get inflation down to where it needs to be,” he said.
Treasurer Jim Chalmers could be forced to oversee a recession if there is another rate hike, economists say. Picture: Martin Ollman
“The RBA is going to need the economy to remain weak for a persistent period to get inflation to come down from here.”
Financial commentator Alan Kohler also warned there was now a recession risk, saying consumer sentiment was already fragile.
“If there’s a rate hike in September, later this month, and especially if there’s another one in November, I reckon we’re in for a recession.”
Markets have tipped a 76 per cent chance of a rate hike in September, according to the latest ASX rates indicator.