Profit ratio

Australia’s central bank chief says interest rates must rise despite financial woes

The Governor of the Reserve Bank of Australia gave a rare television interview on Tuesday evening to insist bluntly that interest rates must continue to rise, despite immense financial stress on working-class households as the cost of living is skyrocketing.

Reserve Bank of Australia Governor Philip Lowe interviewed on ABC-TV (Image: YouTube ABC News “7.30”)

It was a blatant move to help the Labor government and the unions suppress workers’ rising wage demands, depressing consumer spending and therefore labor demand, even at the cost of a recession.

While appearing on the Australian Broadcasting Corporation’s ‘7.30’, Philip Lowe also sought to reinforce the government’s sudden, post-election discovery of the need to cut social spending to reduce record budget deficits and the looming $1 trillion federal debt.

Lowe said people need to think about how the federal government will continue to pay for whatever voters want. The “biggest budget problem” was paying for the higher expenditures the community was expecting for disability, elder care, health care and defence.

“Public funds are increasingly in demand. It’s harder to know how we’re going to pay for it,” he said.

Speaking for the first time since the bank announced the 0.5 percentage point hike to 0.85% in interest rates last week, the biggest in 22 years, Lowe said: “Australians must be prepared for higher interest rates”.

At the same time, he delivered another shock to working-class households, announcing that the bank now expects the official inflation rate, as measured by the consumer price index, to reach 7% by the end of the year, reversing its previous forecast of 6 percent.

In other words, interest rates must be pushed up, with potentially devastating consequences for heavily indebted households in terms of soaring mortgage rates and rents, in addition to exorbitant costs of gasoline, electricity, domestic gas and food.

Lowe added that it was “reasonable” to expect interest rates to hit around 2.5% at some point, but it was “unclear” how far they would rise. Financial markets are now betting on a central bank cash rate rising to 4% early next year and 4.2% by May 2023.

For a household with a typical variable rate mortgage of $500,000 over 25 years, this would add more than $1,000 per month to repayments; for $750,000, additional repayments would be over $1,500 and for $1 million, over $2,000.

Lowe sought to justify the rate hikes by saying households saved $250 billion during the COVID-19 pandemic. “The current savings rate is very high,” so people could afford higher repayments, he said.

This “savings” figure is a misleading aggregate. It reflects the wealth of the wealthiest sections of society, while airbrushing the indebtedness and cost of living crisis facing working people.

Studies have shown that even before the Reserve Bank raised its key rate by a total of 0.75 percentage points over the past month, more than 70% of households in some popular suburbs, particularly in Sydney and in Melbourne, were already suffering from “mortgage stress”. .”

Lowe has refused to apologize for the bank insisting, until recent months, that it would not start raising rates from their near-zero “emergency” levels for two years until 2024 He said those statements were not “promises”, even while conceding that those assurances would have influenced how much some people borrowed.

In fact, hundreds of thousands of homebuyers relied on bank forecasts when they took out huge mortgages due to soaring house prices – the median house prices in Sydney and Melbourne exceeding $1 million, up more than 30% in two years.

A letter to banks this week from the Australian Prudential Regulation Authority underscored this reality. It warned that its data for the March quarter showed 23.1% of new mortgages had a debt-to-income ratio of six times or more, the level it considered “risky”. The volume of high debt-to-income mortgages was only slightly down from a record 24.3% in the December quarter.

A growing number of these people, and other recent buyers, are now faced with the likelihood of “negative equity” in their homes, that is, they owe more than the property is worth, as house prices are expected to fall by up to 20% in major cities following bank rate hikes.

A “hurricane” is looming

Australian Business columnist Robert Gottliebsen warned this week of a “hurricane” about to hit the housing market as “a large portion of those who borrowed the whopping $650 billion total (30% of the outstanding housing loans) during the two-year bank lending spree owe more on their homes than they are worth.

In April, Australian household debt, mostly mortgages, was around 130% of gross domestic product, among the highest levels in the world. Household debt to disposable income was 203%, down from 50% in the 1980s. Despite two years of historically low interest rates, more than 13% of income was used to service debt, a higher than in 1989-90, when interest rates peaked at nearly 20%.

Data released by home loan provider Joust and Digital Finance Analytics in March estimated that even before the Reserve Bank’s two rate hikes, 42% of homebuyers were already in mortgage trouble, measured by having to spend 30% or more of their income on mortgage repayments.

This totaled 1.5 million households. A 3% increase in interest rates would have added almost another million, bringing the proportion to about 50%.

Sydney’s outer south-west suburbs have seen the worst mortgage stress, affecting 76.5% of borrowers in Macarthur’s Campbelltown electorate. In the Chifley seat, west of Sydney, covering Mount Druitt and Rooty Hill, 66.8% were stressed.

Across Melbourne, the outer suburbs also had the highest levels of stress – 57.1% of borrowers in the southeast electorate of Bruce, covering Narre Warren, and 53.4% ​​of the northern seat of Calwell, covering Craigieburn.

In Brisbane, 46.6% of borrowers were in mortgage trouble in the north seat of Lilley, taking Chermside.

This crisis has been the result of ruthless capitalist profiteering, especially financial speculators and property developers, for decades. Since the 1990s, housing prices have risen from 2.5 times annual household income to more than six times today.

As a result, homeownership rates are falling rapidly, especially among those under 40. On current trends, less than 55% of people born after 1990 will own a home by age 40, compared to an all-time high of nearly 72 years. percent.

This reversal does not only affect young people. The proportion of homeowners aged 55 to 64 who still owe money on mortgages has tripled from 14% to 47% over the past 25 years.

This situation will get worse. In his Australian article, Gottliebsen wrote: “Few Australians have any idea of ​​the force behind the hurricane which now looks certain to hit the homebuilding market in 2023. Unless heavily borrowed builders and homeowners understand what is coming, they will be severely mutilated.

According to Murdoch’s media columnist, “the fact that this total national transformation erupted in the first two weeks of a new government is staggering, given that it was not mentioned during the election campaign.”

What a distortion! Both Labor and the outgoing Liberal-National Coalition, aided by all the mainstream media, cynically covered this crisis, and all other economic and social disasters, throughout the election campaign. Now the false claims, encapsulated in the Labor Party’s election slogan “a brighter future”, are being thrown overboard.

Lowe’s statements followed those last week from Treasury Secretary Steven Kennedy. Evidently, speaking with the agreement of the government, Kennedy made it clear that the government needed to cut social spending – especially in the already severely underfunded health, aged care and disability programs – and stifle the growing demands of workers for salary increases corresponding to the spiraling cost of living. and soaring interest rates.

This message was amplified by the June 14 editorial in the Australian Financial Reviewwho said the Albanian government should “use the snowball shock group to overhaul Australia’s economic program in the same way its Coalition predecessor should have seized on the COVID-19 pandemic – as a flat -burning shape for change”.

The editorial insisted that Treasurer Jim Chalmers and Albanese must ‘begin to verbalize what it really means: that many Labor Party election promises have been rendered redundant’.

It means an explosive collision course with growing sections of the working class, including nurses, older workers, teachers, university staff, bus drivers, public sector workers and others who have already sparked a strike in recent months, demanding wage increases and an end to the soaring cost of living, just like millions of workers around the world.