Reserve Bank governor Philip Lowe has given a strong indication more interest rate rises are on the cards despite nine back-to-back rises causing many households significant pain and leaving them struggling to make repayments on their mortgages.
"There is a risk that we've gone too far and don't need to do anymore, that the economy will slow more than we expect," Dr Lowe told a parliamentary hearing on Friday.
"But there's also a risk that we haven't done enough, that inflation proves more persistent and doesn't come down. And our job is to try and balance those."
The Reserve Bank has been under political scrutiny for during the pandemic indicating that interest rates would not likely rise until 2024, but since lifting the official cash rate at nine consecutive meetings, taking it from 0.1 per cent in April to 3.35 per cent this month as it tries to bring inflation under control.
That leaves many borrowers facing variable interest rates above 6 per cent and heading above 7 per cent, and is set to put households that are locked in fixed rates of 1.5 to 2 per cent in an especially dire situation as they roll off them in the coming months.
It also comes as some of the major banks report a slight uptick in mortgage delinquencies, saying many borrowers are now hitting the limit of lending buffers imposed on banks.
That means, going forward, many Australians may not be able to get a mortgage or will struggle to refinance because, based on their income, the bank will assess that they will be unable to service the loan if interest rates rise further.
Dr Lowe said the central bank board did "recognise that the full effect of the higher interest rates is yet to be felt".
He said nine back-to-back rate rises since May last year had created "a very disparate story" and meant "many households are under very real pressure".
"You're under pressure from rising interest rates and from falling housing prices, so it's a really challenging environment for many people at the moment," Dr Lowe said.
The RBA's assistant governor financial system, Bradley Jones, indicated a number of borrowers with variable rates were already under mortgage stress and lacked spare cashflow.
He said: "The picture is extremely uneven."
"On one hand, you've got around half our variable rate and occupiers who are more than one year ahead on their mortgage payments, in fact, about a third and more than two years ahead," he said.
"At the other end of the distribution, we see observe around 10 per cent of variable-rate unoccupied borrowers who have got virtually no spare cash flow, after they meet their mortgage payments and their living costs, and also have very low buffers."
"And a reasonable share of those households are low-income households and hence have a limited ability to cut back on consumption.
"There's no question that there's a segment of the community that are hurting now. And that's very likely to continue."
More households expected to fall into 'negative equity'
Dr Jones responded to questions about whether the central bank was worried borrowers could fall into negative equity — when the value of property falls below the outstanding balance on the mortgage used to purchase it.
He said that issue impacted "a very, very small proportion" of borrowers, noting it was less than half a per cent of all home loans.
But the RBA, through its "stress tests", has modelled what will happen if house prices fall another 20 per cent.
Dr Jones said in that scenario, the share of loans that would be in negative equity would rise to 4 per cent.
"And a big reason for this is that loans during the pandemic were increasingly written … low loan-to-value ratios," he said.
The big risk is on those who, during the pandemic housing boom, borrowed six or more times their income and/or have loan-to-value ratios of more than 90 per cent (meaning they had deposits of 10 per cent or less).
"So that has engendered a fair amount of resilience in household balance sheets with respect to their ability to withstand a decline in housing prices without falling into negative equity," Dr Jones said.
More rate rises are on the cards
Despite the risk the RBA might have gone too far, Dr Lowe indicated more interest rate rises were on the cards because the central bank had to bring inflation back down to within its 2 to 3 per cent target range.
"We need to take this measure (raising interest rates) to get inflation down," he said, noting the inflation rate reached 7.8 per cent in the December quarter.
"It's too high, way too high … and it's higher than we're expecting just a few months ago," Dr Lowe said.
"High inflation is damaging and it's corrosive. It hurts people. It puts serious pressure on household budgets, and it erodes the value of people's savings, and it increases inequality, and hurts most those on low incomes."
He said it would also damage long-term economic performance, making the environment for businesses and households more uncertain, and harder for firms to invest.
"And if inflation does become ingrained in people's expectations, bringing it back down is very costly," he said.
The central bank forecast is for inflation to ease this year and to drop to 3 per cent by mid-2025.
Dr Lowe said the risk of the RBA not doing enough needed to be balanced with the "risk that we move too fast or too far, and the economy slows by more than is necessary to bring inflation down in a timely way".
"The path here is a narrow one," Dr Lowe said, noting some economic commentators were also concerned about the prospect of a sharp rise in unemployment in the near term.
"The instrument we have to achieve this (lower inflation) is interest rates, which I acknowledge can be a very blunt instrument," he said.
Saving pool high, but largely within wealthier households
Dr Lowe said the Reserve Bank board was "very conscious that the impact is being felt quite unevenly across the community".
"Around one-third of households have a home loan, and many are finding managing the higher interest rates very difficult at the moment," he said.
Dr Lowe said since the onset of the pandemic households had saved an additional $300 billion — equivalent to about 20 per cent of annual household disposable income — but those savings were concentrated in households with higher incomes.
"This pool of savings is very, very large. In fact, the pool of …savings in Australia is higher than anywhere else in the world," he said.
He said it was possible households were saving during pandemic lockdowns but could spend the extra money in coming months.
"If what we've been seeing recently is extra spending as people enjoy their usual freedoms for the first time in three years, a period of belt-tightening could now follow," Dr Lowe said.
"But it's also possible that the extra savings and jobs are giving part of the population sufficient confidence to keep spending just at the same time that other people are finding things very difficult at the moment — so it's a really complicated picture at the moment."
Some borrowers are still benefiting from low-interest fixed-rate loans, but many are about to roll off them in the coming months.
"In total, there are around 880,000 loan facilities with fixed rates maturing this year," Dr Lowe said.
"These loan facilities have an outstanding value of around $350 billion.
"These borrowers will face a very significant increase in their loan repayments when they move from the fixed rates to the variable-rate loans."
He said while the RBA was raising the cash rate, there was a lag in the impact of that on mortgage rates, since many people had fixed their rate. He said "transmission to mortgage rates" could take a "couple of years".
He also noted that if wages were to suddenly rise or unemployment shot up, the number of households feeling pain would substantially rise.
Dr Lowe also told the hearing that officials from the RBA would not attend events at investment bank Barrenjoey "for quite some time" after details of an off-the-record private meeting were leaked to the media after a closed-door briefing on February.
The meeting came two days after the central bank handed down its latest interest rate hike.
Dr Lowe said RBA officials would continue to talk to external groups but "we've changed our practice so that … we won't speak until after the statement of monetary policy is released".
'Serviceability buffers could be exceeded', Westpac says
Meanwhile, the banks are reporting an uptick in mortgage delinquencies and are seeing more borrowers hit the limit of lending buffers.
On Friday, Westpac warned almost half of its $471 billion in home loans were written using interest-rate buffers that are soon to be exceeded.
Lender "serviceability buffers" are set by banking regulator APRA to ensure customers can withstand higher repayments if interest rates rise.
Westpac said between August 2019 and June 2022, it had about $212 billion of mortgage loans using a serviceability buffer of between 2.5 per cent and 3 per cent.
But given the cash rate has jumped from a record low of 0.1 per cent last year to 3.35 per cent in February, above the top end of the buffer, Westpac economists say they expect the serviceability buffer for these mortgages to be exceeded.
Westpac also forecast that loan arrears and funding costs would rise. It said it had seen a small increase in the number of mortgage borrowers who were more than 30 days' late on repayments, mainly due to cost-of-living pressures.
The one silver lining of higher interest rates is that rates earned by deposit holders rise. Three of the big four banks have now increased deposit savings rates.
CBA and NAB on Friday increased the rates on key savings accounts by up to 0.75 percentage points, and last week, ANZ announced it would lift just one savings rate on the back of the RBA decision — its Plus Save account by 0.25 percentage points.
