The Commonwealth Bank is warning of the risk a three-month mortgage lag poses to the economy if the Reserve Bank keeps raising interest rates aggressively.
The RBA has already lifted interest rates four months in a row, quickly taking its official cash rate target from a record low 0.1 per cent to 1.85 per cent.
Later today it is expected to raise rates yet again, with most analysts and traders expecting another half-a-percentage-point increase to take the cash rate to 2.35 per cent — the highest it has been since early 2015.
But most borrowers are only just feeling the effects of the first two rate rises, according to the Commonwealth Bank's head of Australian economics Gareth Aird.
"Interest accrues from a lender's effective rate change date, which is typically about two weeks after the RBA increases the cash rate," he said.
"This interest is added to a borrower's outstanding debt. But from a cash flow perspective the impact is not felt for three months on average for a CBA customer.
"The lags across other lenders vary, but we estimate that on average the lag is around two to three months across the major lenders."
Mr Aird said that means most variable mortgage customers have only seen their minimum repayments adjusted to reflect the RBA's first two rate rises, and not yet the percentage point of hikes made in July and August.
"This means that the bulk of our borrowers have only felt the impact of one 25-basis-point hike on their cash flow (or potentially, as of this week, the cumulative impact of the May 25-basis-point rate hike and June 50-basis-point rate increase)."
'Clear risk' from RBA 'flying blind'
It is no surprise then that the full effect of the rate hikes the RBA has already delivered are not yet being felt at cash registers across the country.
Retail sales hit an all-time high of $34.7 billion in July, up 1.3 per cent from the month before and 16.5 per cent on a year earlier.
Olivia Cummings, director of jewellery company Cleopatra's Bling in Melbourne, said trading conditions were unpredictable, but generally strong.
"We're doing quite well, considering the general stress that people are undergoing with increasing cost of living," she told The Business.
"People are leaning towards getting bespoke gold pieces, because I think you associate gold as a long-term investment, something that won't lose value."
But the 34-year-old business owner is nervous about what could happen if the Reserve Bank's hikes to the cash rate remain aggressive.
"I'm not an economist, but I would say that adding extra stress to people who could be spending their money in the local economy doesn't seem logical to me," she said.
Gareth Aird is an economist, and he has similar concerns.
"The rapid pace at which the RBA has tightened policy, overlaid with a full appreciation of the lags between rate hikes and the cash flow impact on a home borrower, means there's a degree to which the RBA board is flying blind," he said.
"It has simply been too early for the spending data to pick up the impact of the already delivered rate hikes."
This, combined with sluggish wage growth, cost of living pressures and the high debt levels of many Australian households, has Mr Aird convinced that the bank should slow its rate increases going forward.
While he is among the consensus who expect another half-a-percentage-point rate rise later today, he believes the Reserve Bank should slow down rate increases to a quarter of a percentage point thereafter with a peak of either 2.6 or 2.85 per cent in October or November.
"There is a clear risk that the RBA continues to tighten policy aggressively because it appears that demand in the economy is not slowing sufficiently to put the desired downward pressure on inflation," Mr Aird cautioned.
"But that will occur in time as the rate hikes 'kick in'. At CBA, for example, by December the impact of already announced rate rises on monthly cash flow for mortgage holders will be a four-fold increase compared to July."
Fixed-rate roll-off creates 'natural tightening'
Higher interest rates do not just affect her customers; Ms Cummings has her own mortgage repayments to make on the apartment she lives in.
"I'm on a variable [loan], unfortunately. I didn't fix my rate," she said.
"We're sort of in a period where we [the business] want to be able to take more risk, but taking risk in this current climate feels a little bit scarier than usual.
"I'm a risk taker, so I probably will take the risk and just keep working hard."
But Mr Aird warned that the grace period of low rates for most of those who did fix their loans is rapidly running out.
"There is a large proportion of fixed rate home loans that will expire over the next 18 months," he said.
"This creates natural tightening even with the RBA on hold (note that the average loan rate for a borrower rolling off a fixed rate loan over the next eighteen months is around 2.25 per cent. This rate is significantly lower than the standard variable rate, which is likely to rise to 4.5-5.0 per cent with a cash rate of 2.60 per cent)."
At a time when the Reserve Bank is under even more than its usual share of pressure, Mr Aird concluded his note on this ominous warning.
"The Australian economy is largely in the RBA's hands."
