20 February 2023

Is the Reserve Bank really hearing our mortgage pain?

| Ross Solly
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The RBA Governor Philip Lowe

The RBA Governor Philip Lowe appearing before Senate estimates. Photo: Screenshot.

With great fanfare this week, we heard how well Australian banks are travelling at the moment, drowning in profits of an eye-watering level and with nothing but sunshine on the horizon.

The announcement of the Commonwealth Bank’s half-year cash profit of $5.15 billion came hot on the heels earlier this month of record profits for the globe’s biggest oil companies – a lazy $59 billion for Exxon, $40 billion for Shell (its biggest profit in 115 years), and $37 billion for Chevron. Poor old BP could only manage $28 billion.

I’m sure a few of our readers would have choked on their cornflakes as they pondered how they were going to pay their mortgage and cover their energy bills, hearing how the companies doling out the products (home loans and oil) are doing very nicely thank you very much.

Meanwhile, up on the hill, Reserve Bank Governor Philip Lowe was telling all who would listen that, yes, he does have a heavy heart when he hears the news of the personal pain people are experiencing because of spiralling interest rate rises.

But having a heavy heart obviously doesn’t equate to sympathy. The Reserve Bank is likely to raise interest rates at least another two times, Lowe predicted. Please stop blaming me, he said, I’m just the messenger. These are decisions reached by the nine-strong board.

READ ALSO RBA governor tells estimates to expect more interest rate hikes

I know there’s not a lot of love out there for Philip Lowe at the moment. It’s not so much that he and the board keep jacking up interest rates. Most of the anger stems from his ill-advised prediction interest rates would not rise before 2024.

Not unexpectedly, many took the Reserve Bank Governor at his word. Unfortunately for them, and for Lowe, interest rates have risen nine times since then, with more to come.

It’s not surprising people are looking for someone to blame, and Lowe is the obvious target. Whether it’s entirely justified will be argued for as long as this crisis, and it is a crisis, continues.

Many people made financial decisions based on the confident predictions of the man in charge of the Reserve Bank, and are facing the prospect of going to the wall if they haven’t done so already.

Leading economists are now arguing whether using the blunt tool of raising interest rates is still the best method to curb inflation. The goal of interest rate rises is to decrease spending and, believe it or not, ensure there is always a pool of unemployed Australians.

So far, the nine interest rate rises have had little effect on our levels of unemployment.

READ ALSO Don’t mention the war! You might not get away with it

Whatever the best stick to beat down inflation might be, one wonders if we need a community body, similar to the body being discussed for the Voice, to provide advice to the Reserve Bank on how interest rate rises are hurting battlers.

Philip Lowe says he knows people are in pain because he’s heard the news reports. A quick look at the makeup of the Reserve Bank board suggests there are no members who reside on struggle street. They are all upstanding members of the community, don’t get me wrong, but I’m not sure how many of them are currently wondering how to cut corners to ensure they can make their next mortgage payment, if they have mortgages at all.

Perhaps listening to a group of what we call everyday Australians to relate how interest rate rises are hurting them might focus their minds a bit more. It won’t force policy change, I’m sure, but at least it will provide food for thought.

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HiddenDragon7:09 pm 21 Feb 23

The RBA is very good at selective deafness.

It spent many years ignoring people who were saving for a home and saw prices galloping ahead of their ability to save – particularly when they have to pay tax at marginal rates on interest earned.

Likewise, it was deaf to older Australians who were subjected to legalised theft in slow motion of savings (via interest rates which were, as now, often lower than CPI) which took years of working to accumulate.

All of this, along with what many mortgagees are now experiencing, might have been avoided if the RBA had been genuinely independent and applied its selective deafness to the very noisy business groups who want monetary policy distorted for their benefit rather than that of the broader public and the nation.

It’s going to get a lot worse before it gets better. The so called Arab Spring was a direct consequence of the Financial Crisis. It takes years for damage to the economy to work through. The consequences of lockdowns and supply chains disruptions caused by government have only just begun pass through the system. These consequences are going to cause a lot more harm to a lot more people than the virus ever could, and that was obvious two years ago to anyone paying attention. (Aside from being completely incompatible with living in a country that claims to be a free society).

Central banks need to be removed and let the market dictate whats what. Central banks are a menace, and as demonstrated recenlty, have clearly got it wrong and just plain dont care. They want you poor and decimated middle class, so they are jacking up rates to bring about financial fuedalism. When you understand the game, the actions make sense – basiclaly they hate us and want us poor. First covid, now this. It appears to be a planned demolition of the economy. Now we are in WWIII, once that really gets going, if you havent already hoarded gold and silver, youre stuffed…..

Steve Zammit6:34 pm 20 Feb 23

I’m probably wrong,bit I thought when this all started as everybody knows the banks are King already with billions in Covid savings.
Why didn’t they design in so everybody had to pay more towards their superannuation then giving money to the banks.
At least when you retire you would have had more money,and naturally Australia’s retired population of X Generation (not baby boomers) would have more money.
Second thing,Renters will fill major pain when they get that letter of an increase,and it won’t be in 2023 a simple rise of $20-$50,it could be in the hundreds,as seen in the Media.
When Interest rates finally go south,rents won’t,realestate agents will definitely fight the “Jeanie out of the bottle” going back in,so it’s Christmas for realestates,hell for renters.
And that idiot from yellow brick road,saying sell,your kidding right?
He does understand that first homebuyers don’t get grants and free StampDuty a second way round.
People will suffer recession symptoms after the recession for years,and Australia’s rents will be impossible to pay.
Also how is the reserve bank going to slow down inflation on diesel fuel?
Trucks pass on their costs to supermarkets.
All this because of 9 people,who are they?
Maybe the Media can tell us who these people are,it would be interesting.

High inflation is far more damaging than some people having to sell assets they could only afford at record low interest rates. Interest rates were too low for too long and must keep rising.

Brian Carpenter12:50 pm 20 Feb 23

I am a mortgage holder but do understand a little regarding how inflation works. However, instead of taking our money never to be seen again, why can’t that money be used to pay off the principle amount, with none being allowed to access through a redraw facilty. This could be still actioned by the banks as they are doing now, but at least instead of our money dissappearing, it is being used to pay off our asset. The banks will still get their interest, but the additional payments, the money we pay to curb inflation stays ours.

1. Because of the Wealth Effect: https://thebusinessprofessor.com/en_US/economic-analysis-monetary-policy/the-wealth-effect-definition

2. What you describe already exists, it’s called an Offset Account.

The Reserve Bank cannot ignore what is happening to interest rates overseas and if international rates rise, then so too must rates here. If Australian interest rates are kept artificially and comparatively low capital will seek higher returns elsewhere. Interest rates have been at historic lows, which has long benefited borrowers and property speculators, while penalising savers. Now interest rates are rising as they inevitable must. Beneficiaries will be savers. Those who over extended themselves on the belief that rates would stay low forever will find their household budget squeezed as rates rise and will have to cut discretionary expenditure. People who had mortgages in 1989-90 will remember that home loan rates got up to 17.5%.

Lowe saying rates wouldnot rise until 2024 didn’t help the situation. People borrowed more hoping to pay down principal at a lower rate and the rug was pulled out from under them.

Capital Retro3:49 pm 19 Feb 23

If we think things are bad now wait until the international credit rating agencies downgrade us.

A two year wait for a rise is irrelevant over a 30 year loan. Anyone who FOMO’ed in without factoring an interest rate of around 7% was foolish.

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