Australia’s central bank governor says interest rates must rise despite financial hardship
The Governor of Australia’s Reserve Bank gave a rare television interview on Tuesday night to bluntly insist interest rates must continue to rise, notwithstanding the immense financial strain on working-class households as the cost of living soars.
It was a blatant move to help the Labor government and unions quash workers’ rising wage demands by cutting consumer spending and hence demand for labour, even at the expense of a recession.
Appearing on the Australian Broadcasting Corporation’s 7.30 programme, Philip Lowe also attempted to reiterate the government’s sudden post-election discovery of the need to cut social spending to deal with record budget deficits and the looming $1 trillion national debt to lower.
Lowe said people needed to consider how the federal government would continue to pay for all the things voters wanted. The “bigger fiscal problem” was paying for the higher spending the community expected on the disabled, elderly care, health care and defense.
“The demands on the public sector are increasing. It’s harder to figure out how we’re going to pay for that,” he said.
For the first time since the bank announced a 0.5 percentage point hike in interest rates to 0.85 percent last week, the biggest move in 22 years, Lowe said: “Australians need to be prepared for higher interest rates.”
At the same time, he delivered another shock to working-class households by announcing that the bank now expects official inflation, as measured by the CPI, to reach 7 percent by the end of the year, tipping its previous forecast of 6 percent.
In other words, interest rates must be pushed up, with potentially devastating consequences for heavily indebted households in the form of rising mortgage rates and rents, on top of the sky-high costs of gasoline, electricity, household gas and groceries.
Lowe added it was “reasonable” to think interest rates would eventually reach around 2.5 percent, but it was “unclear” how far they would rise. Financial markets are now banking on the central bank’s interest rate reaching 4 percent by early next year and 4.2 percent by May 2023.
For a household with a typical $500,000 25-year adjustable-rate mortgage, this would increase repayment by more than $1,000 per month; at $750,000 the additional repayments would be over $1,500 and at $1 million more than $2,000.
Lowe tried to justify the rate hikes by claiming that households saved $250 billion during the COVID-19 pandemic. “The current savings rate is very high,” so people could afford higher repayments, he said.
This “savings” figure is a misleading figure. It reflects the wealth of the wealthiest sections of society while blurring the debt and cost of living crises facing working people.
Studies have shown that even before the Reserve Bank hiked interest rates by a total of 0.75 percentage points last month, over 70 per cent of households in some working-class outskirts, particularly Sydney and Melbourne, were already experiencing “mortgage stress.”
Lowe refused to apologize for the bank’s insistence, until recent months, that it would not raise rates from its two-year “emergency” level of near zero until 2024. He said those statements weren’t even “promises.” however, acknowledged that these assurances would have affected some individuals’ borrowing.
In fact, hundreds of thousands of homebuyers relied on the bank’s forecasts when taking out huge mortgages as house prices soared – with average house prices in Sydney and Melbourne exceeding $1 million, an increase of more than 30 percent in corresponds to two years.
A letter to banks this week from Australia’s Prudential Regulation Authority underscored that reality. It warned that its data for the March quarter showed 23.1 percent of new mortgages had a debt-to-income ratio of at least six times – the level it considered “risky”. The volume of mortgage loans with a high debt-to-income ratio fell only slightly from a record 24.3 percent in the December quarter.
A growing number of these people and other home buyers are now facing the likelihood of “negative equity” in their homes – meaning they owe more than the property’s value – because house prices are expected to fall by as much as 20 percent in cities as a result the bank’s rate hikes.
A hurricane is imminent
Australian Economics columnist Robert Gottliebsen warned this week of a “hurricane” hitting the housing market because “a large proportion of those who borrowed the whopping $650 billion (30 percent of outstanding home loans) during the bank’s two-year lending doing so will owe more from their home than it is worth.”
In April, Australian household debt, mostly mortgages, was around 130 per cent of gross domestic product, among the highest in the world. Household debt to disposable income was 203 percent, down from 50 percent in the 1980s. Despite two years of record-low interest rates, over 13 percent of proceeds were used to service debt, more than in 1989-90 when interest rates peaked at nearly 20 percent.
Data released in March by home loan and digital finance analytics provider Joust estimated that 42 percent of homebuyers were already in mortgage distress before the Reserve Bank’s two rate hikes, measured by being 30 percent or more of their income had to spend on mortgage repayments.
That was a total of 1.5 million households. A 3 percent increase in interest rates would have added almost another million, making the share about 50 percent.
Sydney’s outer south-west suburbs experienced the worst mortgage stress, affecting 76.5 per cent of borrowers in the Macarthur constituency, including Campbelltown. In Chifley, the seat of western Sydney, which covers Mount Druitt and Rooty Hill, 66.8 per cent were stressed.
Across Melbourne, the outer suburbs also had the highest levels of stress – 57.1 per cent of borrowers in the south-east Bruce constituency, covering Fool Warren, and 53.4 per cent of the northern city of Calwell, covering Craigieburn.
In Brisbane, 46.6 per cent of borrowers in the northern city of Lilley were in mortgage distress, including Chermside.
This crisis is the result of decades of ruthless capitalist profiteering, particularly by financial speculators and property developers. Since the 1990s, house prices have risen from 2.5 times annual household income to more than six times today.
As a result, the homeownership rate is declining rapidly, especially among the under-40s. According to current trends, less than 55 percent of those born after 1990 will own a home by age 40, compared to an all-time high of nearly 72 percent.
This shift isn’t just affecting young people. The proportion of homeowners aged 55 to 64 who still have mortgage debt has tripled from 14 percent to 47 percent in the last 25 years.
This situation will get much worse. In his Australian In an article, Gottliebsen wrote: “Few Australians have any idea of the force behind the hurricane that is sure to hit the housing market in 2023. If builders and highly indebted owners don’t understand what’s coming, they will be hit hard.”
According to the Murdoch Media columnist, “the fact that this total national transformation has erupted in the first two weeks of a new government is staggering, considering it was not discussed during the election campaign.”
What a distortion! Both Labor and the outgoing Liberal-National coalition, backed by the full corporate media, have cynically covered up this crisis and all other economic and social disasters throughout the election campaign. Now the bogus claims summed up in Labour’s election slogan ‘a better future’ are being jettisoned.
Lowe’s statements followed those of Treasury Secretary Steven Kennedy last week. Apparently in concert with the government, Kennedy made it clear that the government must cut welfare spending — particularly in the already severely underfunded health, elder care, and disability programs — and stifle workers’ growing demands for wage increases to meet the rising cost of living and rising interest rates.
This message was reinforced by the June 14 editorial in the Australian Financial Reportwhich declared that the Albanian government “needed to use the snowballing accumulation of shocks to reshape Australia’s economic agenda in the same way its coalition predecessor should have used the COVID-19 pandemic – as a burning platform for change”.
The editorial insisted Treasurer Jim Chalmers and Albanese “needed to start verbalizing what it actually means: that many of Labor’s campaign promises have been made redundant”.
That means an explosive collision course with the growing sections of the working class, including nurses, geriatric workers, teachers, university workers, bus drivers, public sector workers and others, who have already been on strike in recent months demanding wage increases to end the rising cost of living, as have millions by workers around the world.