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The Reserve Bank is playing a risky game by jacking up interest rates while confidently guessing fixed-rate borrowers have stashed away additional repayments. They haven't.
When he appeared before a Senate committee last month, RBA governor Philip Lowe copped plenty of pointy questions about the impact of rising interest rates on borrowers. One issue of particular importance was fixed-rate borrowers who had locked in rates as low as 2 per cent during the pandemic.
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The RBA enabled fierce competition among the banks by reducing the cash rate to 10 basis points, driving fixed-rate mortgage rate to historical lows.
But with the fixed rate cliff now upon us, Mr Lowe was forced to answer for his actions, which will see those paying 2 per cent soon paying 5 per cent or more when their fixed-rate term expires.
“The banks tell us that people with fixed rate loans – most of them – have been pretty cautious. They knew interest rates weren’t going to stay low forever,” Mr Lowe told the committee.
“Not everyone is in that case, though. Some people have taken the low-interest rate to allow them to spend more and those people are going to face a lot more difficulty when interest rates go up by 3 per cent.”
The RBA governor is relying on anecdotal evidence here, which cannot be verified. When he claims “the banks tell us” that most Australians have been pretty cautious, it’s easy to be sceptical. Particularly without any hard figures to back it up.
In its latest Bulletin released on Thursday (16 March), the central bank admitted that it has no idea how many fixed-rate borrowers are setting aside cash for higher repayments: "It is not possible to observe how much of the cash flow associated with experiencing lower loan payments that borrowers on fixed-rate mortgages have actually saved (or will save),” the RBA said.
“While many borrowers on fixed rates may have saved or be saving in preparation for higher loan payments, some may have used the period of low fixed borrowing costs to consume more than they would have otherwise.”
The Reserve Bank is being far too optimistic in thinking, as Mr Lowe stated last month, that “most” borrowers on fixed-rates will be able to weather the storm. A quick look at how Aussies spent their super during the pandemic should be an easy indicator of how we behave when excess cash is readily available.
Around 2.6 million Australians withdrew $38 billion from superannuation during the Morrison government’s controversial Early Access to Super Scheme. A new study from economists at The George Washington University, Australian National University and Harvard University found most of the money was used for ATM withdrawals as high as $1,200, gambling and credit card repayments. The scheme was eligible to those who had lost their job or seen their hours reduced significantly, yet 17 per cent of working Australians used it.
Meanwhile, Australians are spending more than they have in three years. Total retail trade has increased by 27 per cent between January 2020 and January 2023, according to figures from the Australian Bureau of Statistics (ABS).
But the Reserve Bank knows all of this. It’s hiking rates to stop people spending money in order to reduce inflation. If people were saving money rather than spending it, it wouldn’t be lifting rates. Which leads me to believe most borrowers on fixed-rates have been spending just as much as the rest of us.
[Related: RBA in the dark about fixed rate borrower savings]
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