Reserve Bank governor Michele Bullock has used her first formal speech to warn borrowers another interest rate rise may be needed to control inflation, while revealing up to a quarter of highly leveraged people with variable mortgages are living beyond their means.
Before the release of the September-quarter consumer price index on Wednesday, Bullock said that while inflation could ease with the current cash rate of 4.1 per cent, rates might have to increase.
Economists are expecting consumer prices, in part driven by the spike in global oil prices, to have risen 1.1 per cent in the past quarter. The annual rate of inflation, which peaked at 7.8 per cent in December, is expected to step down to about 5.3 per cent.
Financial markets put the chance of a rate rise at the RBA’s Melbourne Cup Day meeting at one in four.
Addressing the Commonwealth Bank’s global markets conference in Sydney on Tuesday night, Bullock signalled the RBA board would closely examine this week’s inflation figures and whether prices were coming down fast enough under current interest rate settings.
“It is possible that this can be done with the cash rate at its current level, but there are risks that could see inflation return to target more slowly than currently forecast,” she said.
“The [bank] board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation. At the same time, the board is mindful that growth in demand and the rate of inflation have been moderating, and that there are long lags in the transmission of monetary policy.”
Bullock said the bank was mindful of trying to bring inflation down without damaging the jobs market.
Official data last week showed another drop in full-time employment in September. The country has shed 53,200 full-time jobs since June, with the unemployment rate being held down by a drop in the participation rate.
Charity and welfare organisations have reported a jump in the number of people asking for assistance as inflation and higher mortgage repayments reduce their incomes.
Bullock said those with mortgages had experienced a “significant decline” in spare cash compared with renters or those who owned their home outright. Higher interest costs on variable-rate mortgages had reduced their cash flow more than overall inflation.
According to Bullock, about 5 per cent of all variable-rate borrowers – almost 200,000 households – are now paying more for essential expenses and their mortgages than they earn.
About 25 per cent of highly leveraged people – those with loans at least four times their income – are spending more than they earn.
“These borrowers may be finding ways to make ends meet, but this can involve some difficult financial decisions,” Bullock said.
“This could include drawing on past savings, working extra hours if they are able, or forgoing some expenditure that would in normal times be considered non-discretionary. At the extreme, it could involve negotiating a hardship program with their lender or selling their property.”
Even this could be an understatement of the number of households struggling at present.
Using a broader measure of essential expenses, which can include outgoings such as private school fees and health insurance, Bullock noted about 15 per cent of borrowers could not make ends meet at present. Among the highly leveraged, the proportion soared to 50 per cent.
Bullock said the bank wanted to ensure the public had confidence it would return inflation to its target band of 2 to 3 per cent. If those expectations shifted, and people believed inflation would be higher for longer, the Reserve would have to tighten monetary policy even further.
“The board has been clear that it has a low tolerance for allowing inflation to return to target more slowly than currently expected,” she said. “Accepting this would risk eroding public credibility in our commitment to low and stable inflation.”
Answering questions after her speech, Bullock said there were signs in the economy that the bank’s rate rises were having an effect, but there were contrasting forces: household budgets were looking solid, but spending was declining.
“On the one hand, household balance sheets are actually pretty solid,” she said. “On the other hand, real household disposable incomes have taken a hit.”
Bullock said one of the benefits of the central bank’s target range for inflation of 2-3 per cent was that it was flexible, which meant the bank could give itself time to get it back within that range.
“It means that if we think we can bring it down a bit slower, and that’s what we’re trying to do, we could,” she said.
“So the advantage of our inflation target is it is flexible and allows us time if we need it, but we still have to be mindful that we don’t want to be out of target for too long.”
Bullock said that generally Australians still expected the bank to get inflation back down, but the longer inflation remains too high increases the risk of people’s inflation expectations changing.
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