Are the rate rises working?
We know inflation was recently reported at 7.8% for the December quarter. In turn we have seen another 25-basis point rise yesterday by the reserve bank, pushing the cash rate to 3.35%. I wanted to take a deep dive to see if these rate rises are having as much of an impact on inflation as the RBA thinks.
One of the major problems with the RBA strategy is that around 800,000 ($370 billion worth) loans are still on fixed rates and those families are yet to feel the impact of 9 consecutive rate rises. Most of these are coming off fixed interest rates within the current financial year.
According to the most recent census, there are 9.8 million households in Australia. 3.3 million with a mortgage, 2.9 million without a mortgage and 2.9 million owned by investors. (The rest are made up of misc. households such as public housing) What this tells me is that 1 in 3 homes will feel the interest rate pinch and 1 in 3 are not impacted, in fact the people that own their homes outright are essentially benefiting from interest rate rises assuming they have some savings (I appreciate savings rates have not gone up as quick as mortgage rates). The last 1 in 3 are the renters in which the landlords are getting bigger and better tax deductions due to higher costs, while the tenants are being forced to fork out up to 30% more in rental payments than their previous rental agreement price due to the rental crisis.
The majority of low to middle socio-economic families are struggling. Renters and people with mortgages on their owner-occupied homes are living pay check to pay check since rates and rents are on the rise, as well as record highs in cost of living. Property investors and people who own their home outright are benefiting with a better savings rate and higher tax offsets.
In a nutshell, the interest rate rises are not having as much of an impact on inflation as the RBA and government once thought. The causes of inflation seem to be the spending done by the minority of Australians, not impacted negatively by rate rises, as well as global factors such as the Russian invasion of Ukraine.
The bottom line is that the inflation of all goods and services at such a high rate impacts all Australians, no matter where they fit on the socio-economic ladder, and it needs to come down.
The question now, what else can the RBA and government do through policy to reduce inflation without the continued pressure on the low – middle socioeconomic population of Australia?
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