The majority of Australians have been spooked from taking out a loan after the RBA’s 10 consecutive interest rate hikes, while also saying they have lost faith in the central bank’s decisions, research shows.
Seven out of 10 Australians say rising interest rates would have put them off a home, car or personal loan if they were in the market for one last year, a survey of more than 1000 people by finance platform Money.com.au found.
Last month saw the Reserve Bank of Australia hit pause after 10 months of hikes, leaving the cash rate at a decade-high of 3.6 per cent.
Independent economist Saul Eslake told The New Daily he anticipates the RBA will hit pause again on Tuesday, after annual inflation declined 0.8 per cent between the December and March quarters, with the price of clothing, footwear, furniture, household appliances and petrol falling.
But he warned “aggrieved” Australians are yet to feel the full effects of the monetary policy, echoing RBA boss Philip Lowe’s comments that monetary policy operates with a lag.
More than 800,000 households will feel the full impact of the interest rate hikes when their home loans reset this year, after taking out fixed-term loans earlier in the pandemic based on the RBA’s advice that rates wouldn’t increase until 2024.
Mr Eslake said research that Australians are getting more wary of taking out loans shows the RBA’s strategy to strangle inflation is working.
“That’s part of the way monetary policy works … it’s meant to make people more cautious about borrowing money in order to buy things, whether it’s to buy houses or consumer durables,” he said.
“It’s not nice, but getting inflation down is a painful thing.
“That’s why it’s best to prevent it getting up in the first place … and because the Reserve Bank, like its counterparts in other countries, was slow to recognise that inflationary pressures were building, they’ve had to slam the brakes on much harder.”
It’s probable the RBA will continue to wait and see how the full effects of their monetary policy will continue to play out.
Mr Eslake said it’s increasingly likely interest rates have hit their peak – but Australians shouldn’t expect a rate cut until at least 2024.
Trust in the RBA is broken
Money.com.au‘s survey shows the RBA has created a great sense of scepticism in the Australian public after backtracking over its interest rate predictions.
Now, 60 per cent of Australians don’t trust the RBA to get the balance right between interest rates, inflation, and the ability of Australians to afford their loan repayments.
The survey was conducted before the government released its review into the RBA, with the key recommendation being the creation of two separate RBA boards – one to set interest rates and the other to be responsible for governance.
The new monetary policy board would set the cash rate and would be made up of macro-economists, monetary policy specialists and labour market experts.
On the current board are two RBA members including Dr Lowe, the Treasury secretary, five business people and an academic.
Mr Eslake said the proposed change would follow overseas central bank models seen in Canada and the UK, which had provided similar inflation forecasts to the RBA but, unlike Australia’s central bank, hadn’t set a date as to when interest rates would rise.
Helen Baker, licensed financial adviser and Money.com.au spokesperson, said it’s understandable the public has lost trust in the RBA after the bank “went against their promises” that rates wouldn’t rise until 2024.
“The RBA is now under a lot of pressure for their upcoming review in May,” she said.
“However, borrowers should consider their own financial needs if they are seeking a loan this year. It would be advisable to speak to an expert, or complete thorough research, into whether a fixed or variable interest rate is better suited to your needs.
“If the RBA do end up increasing rates throughout the year a fixed rate may be more advantageous. But if they suddenly come down, borrowers could be left high and dry.”
