This week the governor of the Reserve Bank, Philip Lowe, apologised to people who listened to the RBA’s statements on future rate rises. The worry now is that he will have to come back next year and apologise for raising rates longer than he should have.
You know the feeling – you’ve had a wonderful meal, you feel good and then you think, “Oh just one more piece”. You quickly realise that was a bad choice. Just one extra bite took you from replete to sickly-stuffed.
Right now, the Reserve Bank is trying to work out if it needs to take another few bites or has it (and more importantly, Australian households) had enough.
In the past inflation was only measured every quarter but fortunately the Bureau of Statistics has begun measuring it monthly. This gives us (and the RBA, which meets next week to decide if it should raise rates) a quicker idea of what is going on.
The ABS estimates that in October annual inflation slowed, from 7.3% to 6.9%. This was well below estimates and marked four months where inflation has hovered around 7%. It suggests that inflation might have peaked:
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Next Wednesday, the day after the RBA makes its decision, the September quarter GDP figures are released, which will provide more information – not just about prices, but whether the economy is slowing.
Most importantly for the Reserve Bank it will provide information about how households are travelling.
We already have some signs that people are starting to feel the pinch.
On Monday the ABS revealed that, rather unexpectedly, we spent less money in shops in October than we did in September. The fall wasn’t that massive – down 0.2%, and we still spent about 12.5% more than we did in October 2021.
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But it was significant because as prices are rising, it means the number of things we bought (or the “volume”) fell quite significantly.
We got some indication this was happening from the most recent quarterly figures which, unlike the monthly ones, count the volume of spending as well as the actual cash amount.
For example, the dollar amount we spent on household goods (furniture, hardware and white goods) continued to grow.
But the volume of those items has fallen for three quarters and is now below the level it was in the June 2020 quarter.
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This is important because household consumption makes up around 55% of the size of economy and in the past year has been responsible for around 85% of the entire growth of the economy.
If household consumption slows, so does the economy.
And while retail spending is only a part of total household consumption (for example, it doesn’t include rent, electricity or health), the two measures do move in sync:
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The problem is the September GDP figures won’t include the impact of the October or November rates rises, and not even the full impact from the September increase.
That combined represents 100 of the 275 basis points rate increase since April.
But another problem with interest rates is that they actually take a while to affect all mortgage holders.
Banks notoriously raise rates very quickly when the RBA increases the cash rate, but that applies to new home loans. The rates for existing mortgages generally take a little longer to go up (but go up they do!).
Generally, the average interest rate for all mortgage holders is lower than the advertised rates for new loans. And because people can change loans to seek a better deal, the average rate for mortgage holders generally goes up more slowly:
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In September the average interest rate being paid by all mortgage holders was 4.04%, compared with the average discounted rate of 5.70%.
More crucially, the average rate for existing loans had only risen 141 points from April to September compared with a 225 point rise in the discounted rate.
Now don’t celebrate too soon – those rates will keep rising, as the impact of the September, October and November rates rises flow through.
Even if the RBA stops raising the cash rate now, mortgage rates for most people will still be likely to rise in the future. And that means any more rate rises might be working to stop spending that has already stopped
Because the rate rises have already been significant.
Monthly repayments for a $500,000 loan at the average rate have gone from $2,010 in April to $2,399 in September and are likely to rise at least another $90 or so to take into account the latest rate rises.
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That is a 19% increase in interest rate payments to September, and if we conservatively add another 30 basis points on to the average mortgage rate, it means at least a 26% increase in the amount households pay each month compared with April.
That is a massive impost and not surprisingly is seeing a decline in the growth of new mortgages but also a drop in the number of things we are buying.
The signs are around that the rate rises have already had a big impact and inflation may have peaked. The RBA needs to watch that it does not overdo the rate rises and go from delivering a good economy that leaves us satisfied to one that has us feeling very sick.
• Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
