Rate rise No. 12 dozen mean good news for anyone

Hands up if you’ve had enough of the Reserve Bank of Australia’s interest-rate rises hammering home loans and other debts in the past year?

I think I just heard a “whoosh” as arms soared skywards in mortgage-laden households everywhere, and perhaps a few swear words from borrowers about what they think of the rate rises.

As the RBA mulls making another move higher at its monthly board meeting on Tuesday, surging debt repayments are strangling household budgets.

This time a year ago the RBA’s official cash rate was 0.35 per cent. This time next week it could be 4.1 per cent if our central bank lifts it again.

Up until a few days ago there was only a slight chance of a rate rise at the June 6 RBA meeting, but higher than expected monthly inflation data turned the screws – raising the odds from below 10 per cent to about 20 per cent.

Predicting how many more cash-rate rises are coming is a dangerous game. I wrongly wrote a year ago that there was no way we would get to 3 per cent – because the soaring costs would push too many consumers to the wall and they would stop spending, which would lower inflation to the RBA’s 2-3 per cent target.

However, here we are with an RBA rate of 3.85 per cent, and most mortgage interest rates sitting about 2 percentage points above that.

Many households have been surprisingly resilient against the barrage of 11 rate rises since May 2022, and are still spending money.

However economists say there finally appears to be a financial squeeze under way, with consumer confidence plunging across Australia, retail sales falling in a hole, and the risks of recession rising. That pain won’t necessarily stop the RBA from lifting its cash rate again.

A prominent US investment bank last week forecast two more rate rises – in June and July, although broader financial markets suggest the chance of a June increase is well below 50-50.

It’s devastating for many households with big mortgages to have seen their repayments surge 50 per cent in a year, and many others are only now watching in panic as their lowrate fixed loans revert to much higher variable rates – this is known as the “mortgage cliff”.

While much is said about the impact on borrowers with home loans and struggling businesses, this rapid run of rate rises has been great news for an equally large proportion of the population: savers.

Many retirees lived off bank interest before rates dropped to puny levels well before the pandemic.

Young savers also benefit from higher returns on their bank deposits.

Now they are finally seeing deposit rates around 5 per cent or more, giving them some return on their conservative and safe cash investments.

While higher deposit income is welcome, that money is still effectively going backwards after the impact of inflation running at 6-7 per cent and income tax payable on bank interest.

Whatever happens next, someone will lose – borrowers if rates go higher, savers if rates drop, and everyone if inflation stays high, which is why the RBA will do whatever it takes to bring inflation back down.

As for the question of “Will they or won’t they?”, perhaps it’s better to avoid guessing and instead add some perspective to the debate.

An interesting chart on the RBA’s website shows that for most of the last 33 years the cash rate has been higher than it is today.

But sadly for relatively recent borrowers, it’s already at its highest level since 2012.