By Shane Wright
Home buyers will be collateral damage as the Reserve Bank drives up interest rates to slow inflation and the federal government faces pressure to adopt long-term economic reforms to safeguard the budget and economy.
Macroeconomics Advisory chief economist Stephen Anthony said those who used recent record-low interest rates to get into the property market were likely to be “burned” as the RBA was forced to take official interest rates as high as 5 per cent.
Inflation has surged across the world over recent months, driven up by loose monetary policy, huge budget deficits, supply chain blockages, strong domestic demand for goods and the war in Ukraine.
The Australian Institute of Petroleum on Monday reported the national average unleaded petrol price lifted by 6.4¢ a litre last week to 211.9¢ a litre. It is the second-highest level on record. Capital city records were set in Brisbane (219.3¢), Canberra (220.1¢) and Sydney (216.4¢) while the regional Australia average soared by 10.4¢ to a record high of 211.3¢.
CommSec estimates it is now costing the average family $296.66 a month to fill up their vehicles with petrol, a $75 increase over the past six months.
The RBA believes inflation will reach around 7 per cent by year’s end, which would be the highest level since June 1990.
Anthony said the days of governments relying on cheap money to paper over their economies’ ingrained problems were rapidly coming to an end.
The former Treasury and International Monetary Fund official, who earlier this year warned interest rates were likely to outpace economic growth, said people who had borrowed heavily to get into the property market were going to pay the price for that long-term policy failure.
“It’s looking really ugly over time. People who have borrowed a lot on the expectation that interest rates won’t go up are going to be burned,” Anthony said.
“Monetary policy has been used to kick the can down the road but it’s come to an end. Now there is a choice between sky-high inflation or sky-high asset prices, and the asset prices are the ones that have to come to an end.”
Commercial banks have already detected surprise among many customers, most with extremely large mortgages, that interest rates have gone up.
Many customers did not expect interest rates, which the RBA has increased at its past two meetings and is likely to lift by another 0.5 percentage points in early July, would increase at all. Before this year’s increases, interest rates had consistently fallen since 2010.
The Bank for International Settlements (BIS) this week used its annual report to warn the world faced an outbreak of stagflation as central banks lifted interest rates in response to soaring inflation.
It said governments had relied on budget deficits and ultra-low interest rates to generate economic growth when instead they should be looking at major structural reforms.
“For far too long, there has been a temptation to turn to fiscal and monetary policy to boost growth, regardless of the underlying causes of weakness,” it said.
HSBC Australia chief economist Paul Bloxham said there was now a growing risk of a local recession.
He said while households had increased their savings by $250 billion through the COVID-19 pandemic, an expected fall in property prices and higher interest rates might lead to consumers reducing their expenditure.
“Many households may choose to use their excess savings to pay down their higher debt, or continue to use it as a buffer against higher mortgage rates,” he said. “Although it is not our central case, high inflation and rising interest rates mean an increasing risk that Australia’s economy faces a recession in the next 12 to 18 months.”
Finance Minister Katy Gallagher said there were challenges for both the budget and the broader economy.
“We have a really unique set of circumstances at the moment and challenges. We’ve got cost of living going through the roof, we’ve got rising interest rates, we’ve got wages still stagnant, and that’s presenting some real challenges to people,” she said
“The job for budget repair has to be done. I mean, it’s not one that we can just leave and hope that things get better in the long run, there is a structural deficit that our budget’s facing.”
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