Bullock doubles down on rate warning

Reserve Bank governor Michele Bullock has acknowledged the bleak reality of households struggling with high interest rates, and conceded some may “make the difficult decision to sell their homes”.

In a speech to the Anika Foundation fundraising lunch in Sydney on Thursday, Ms Bullock said the board was “very conscious” of how interest rates, currently at 13-year-high of 4.35 per cent, were affecting households and business.

While homeowners struggling with a “cash flow shortfall,” where their essential spending and mortgage repayments where dwarfing their income, was “fairly small,” she said they would need to make “quite painful adjustments”.

“This includes things like cutting back on their spending to the more essential items, trading down to lower quality goods and services, dipping into their savings or working extra hours.

Some may ultimately make the difficult decision to sell their homes,” she said.

“A really important point to note here, is that lower income borrowers are over-represented in

the group of people who are really struggling.”

However, she said “inflation causes hardship too,” especially for vulnerable Australians.

“Our experience of how costly inflation can be is the reason that getting inflation back to the target range is our priority,” she said.

However Ms Bullock doubled down on her warning that Australians should not expect a rate cut in the near term, saying inflation is the number one risk to the household economy.

She said that was why the RBA expected the cash rate would remain elevated for some time and that it was “premature” to be talking about rate cuts.

At the earliest, most economists have tipped a February rate cut, with others saying it could be delayed until the second quarter of the year, after March.

“Circumstances may change, of course, and if economic conditions don’t evolve as expected, the Board will respond accordingly,” said Ms Bullock.

“But if the economy evolves broadly as anticipated, the Board does not expect that it will be in a position to cut rates in the near term.”

Her comments follow Treasurer Jim Chalmers who on Sunday said a high degree of global uncertainty, and “rate rises” were “smashing the economy”.

On Wednesday, updated GDP figures from the June quarter also revealed Australia’s economy had only grown a subdued 0.2 per cent since the May quarter, with seasonally adjusted year-on-year growth at just 1.0 per cent.

Ms Bullock warned that if high inflation became entrenched, the bank would have to enforce “even higher interest rates” which would lead to a “larger rise in unemployment and higher risk of recession”.

This, she said, would disproportionately affect “lower income households”.

“This experience is consistent across groups of workers. But job losses tend to be disproportionately borne by some members of the community – the young, those who are less educated, and people on lower incomes and with less wealth (including renters),” she said.

“A weak labour market also hurts those who keep their jobs, whether through a reduction in hours worked or lower wages growth.”

In her speech, Ms Bullock said the key drivers of inflation included housing costs and market services inflation, while discretionary spending was down.

She also acknowledged inflation had disproportionately put greater pressure on poorer and younger households, who were forced to allocate their funds towards essentials like “food, utility bills and rent”.

Whereas higher income households were able to spend more on “owner-occupied housing as well as discretionary items such as consumer durables”.

Ms Bullock also noted both groups were also more affected by the cost-of-living crunch.

“They are often budget-constrained and have less scope to reduce their spending on discretionary items to balance their budgets,” she said.

“They may also have less scope to reduce spending via trading down to cheaper items within the same category if they were already purchasing lower cost items.

“Moreover, they typically have smaller savings buffers and so less scope to use savings to maintain their current standard of living.”