RBA interest rates: More pain looms for homeowners as central bank struggles to wrangle inflation

Money man David Koch is pulling no punches, blaming government spending - which is now running at almost 30 per cent of gross domestic product - for exacerbating inflation.

“Yes, inflation is running too hot, but we can’t just punish everyday Australians and blame petrol and power bills,” he said.

“When food and energy is stripped out of the figures, Australia has the highest ‘core’ inflation of 14 economies — higher than the US, UK, New Zealand and the European Union.

“Governments need to take responsibility for their contribution to inflation, too.”

He’s asking treasurers across the country to stick to the rules ...

Under my statement, every government would have to:

• Pay for it. While trimmed mean inflation is above 3 per cent, any new spending, tax cut or cost-of-living payment has to be fully offset by savings or extra revenue in the same budget.
• Spend within its means. Spending growth stays close to what the economy can actually sustain.
• Bank the windfalls. When the tax take or mining royalties come in higher than expected, the extra pays down debt instead of being spent.
• Cap fees and charges. Government fees and charges rise by no more than 2.5 per cent a year, the middle of the RBA’s target.
• Target the help. Any cost-of-living relief goes to the households that really need it. No more blanket rebates that make the inflation figures look good for a few months.

Few phrases create more anxiety for homeowners than negative equity.

It sounds alarming. It generates headlines. And for many Australians, particularly first-homebuyers who entered the market with smaller deposits, it can feel like a financial nightmare.

But before borrowers panic it’s important to understand what negative equity actually is, and what it isn’t, wrote Chris Foster-Ramsay, director of Foster Ramsay Finance, in Your Money in The West Australian.

Negative equity occurs when the amount owed on a home loan exceeds the property’s current market value. For example, if a homeowner owes $700,000 on their mortgage but the property is now worth $650,000, they are effectively $50,000 in negative equity.

On paper, that’s uncomfortable.

But in reality, negative equity only becomes a significant problem when a borrower is forced to sell, refinance or access equity while the property’s value remains below the loan balance.

Read more here.

Treasurer Jim Chalmers this morning said the Government would announce more savings in the mid-year Budget update in December.

“A lot of Australians are bracing for a difficult decision from the Reserve Bank today,” he told ABC Radio National.

“People are under substantial pressure already, and obviously if rates go up today, that will make things much harder especially when there are already a number of rate rises in the system and their full effect hasn’t been felt yet.

“When it comes to the government’s responsibilities, regardless of the decision that the Reserve Bank takes independently this afternoon, we know that there is more work to do to make the budget as tight as it can be.”

He said the Government needed to weigh up all of the considerations and all of the pressures, “that we’re dealing with right now whether they be global pressures or domestic pressures”.

“We do have an inflation challenge in our economy. It is made much worse by the war in the Middle East.

“The responsibility that we accept, the responsibility that we embrace, is to do in our ninth budget update, what we’ve done in the first eight, which is to find responsible savings where we can, which respond to the economic conditions that we confront together as Australians.”

As hard as a rate hike in September was to swallow for millions of households with a mortgage, the general consensus among market punters is that it won’t stop there.

The cumulative pain for the hundreds of extra dollars each month most have already had to find will be a distant memory if the central bank decides to go for a fifth increase today.

So, what would that look like if it happens?

Someone with a $500,000 mortgage with 25 years remaining would need to find an extra $77 a month, taking their total extra cost across five hikes to $380 a month.

Closer to the average mortgage size of $731,000, someone with a $700,000 loan on the same terms would need an extra $92 a month, or $532 over the full five hikes.

For a $1 million loan, it would now be an extra $759 a month.

A hike today will take the RBA’s official cash rate to an 18-year high.

Interest rates would not have been this high since December 2008, when they were cut a full percentage point to 4.25 per cent.

With just a third of the nation holding a mortgage, any movement higher disproportionally hits homeowners the hardest.

Acknowledging that lifting rates to curb demand in the economy is the only weapon in the RBA’s toolbox, governor Michele Bullock has been at pains to say that higher inflation hurts everyone.

But it will be families with mortgages that bear the brunt.

Despite already lifting the cash rate four times this year, Australia’s inflation rate remains stubbornly above target.

Australian Bureau of Statistics figures last week showed headline inflation is now running at 4.3 per cent for the 12 months until September.

It was 4 per cent in August.

The trimmed mean inflation rate – the one more closely watched by the RBA because it strips out volatile items - was at 3.6 per cent in September.

Both figures were above the Reserve Bank’s target of 2-3 per cent inflation.

Westpac chief economist Luci Ellis said the war in the Middle East and subsequent fuel price rises had pushed up the inflation rate.

“Inflation is above target, and above what the RBA’s August forecasts implied. Some upside risks identified in August have partially materialised, particularly energy prices,” Ms Ellis said.

“The RBA is especially worried that above-target inflation will become embedded in people’s expectations and pricing decisions.”