The Reserve Bank has urged borrowers and savers to hunt for better deals to put more pressure on banks to offer competitive rates.

RBA governor Philip Lowe said he was concerned banks were not passing on higher interest rates to deposit accounts as fast as they were hiking rates on mortgages.

But he said high rates of refinancing were forcing banks to discount to attract customers, with the average mortgage rate reflecting only 260 basis points of cash rate increases.

“Even though the posted rates that banks charge have gone up 300 basis points, the actual rates that people pay have gone up substantially less than that,” Dr Lowe told a parliamentary committee on Friday.

“If people are switching, the banks have to respond.”

In his opening statement, Dr Lowe defended the central bank’s aggressive interest rate hiking cycle in response to the highest inflation rate since 1990. The RBA has lifted rates at every monthly board meeting since May last year, and has signalled more rises to come.

Dr Lowe said the inflation rate was still “way too high” at 7.8 per cent in the December quarter.

“This is the highest rate in a number of decades and it is higher than we were expecting just a few months ago,” he said.

“How much further interest rates need to increase will depend on developments in the global economy, how household spending evolves and the outlook for inflation and the labour market.”

However, he also signalled some hope for stressed borrowers, saying it was plausible that Australia’s interest rates might start falling in 2024.

He said market pricing hinted at interest rates falling in some major economies during 2023.

Dr Lowe said he recognised many households were facing real financial pressure “from high inflation – including for rents – rising interest rates, and falling housing prices”.

“This is a challenging environment for many people. We recognise that the full effect of higher interest rates is yet to be felt, with some borrowers still benefiting from low-interest fixed-rate loans,” he said.

Dr Lowe also commented on the labour market following the official unemployment rate lifting from 3.5 per cent to 3.7 per cent in January – a higher-than-expected reading.

“The labour market remains tight, with the unemployment rate near a 50-year low,” he said.

However, he acknowledged there were signs of weakening in the labour market.

“Job vacancies remain at a very high level, although some firms report that it has been less difficult to find workers recently than it was a few months back.”

The RBA expects the unemployment rate to gradually drift up due to slower growth and to reach 4.5 per cent by mid-2025.

Friday’s appearance before the House of Representatives economics committee, chaired by Labor MP Daniel Mulino, was Dr Lowe’s second round of questioning from parliamentarians this week.

It followed another 25 basis point interest rate hike last week that took the official cash rate to 3.35 per cent.

Refinancing rises with interest rates

Deputy governor Michele Bullock said there were record rates of refinancing, with households continuing switching habits developed during COVID when they had ample time to sort out their finances.

Refinancing for owner-occupiers hit $13 billion in December, according to Australian Bureau of Statistics data, just below the record $13.4 billion set in November.

“People are moving and this is actually, I think, probably a bit of contrast to a few years ago when people didn’t really move,” Ms Bullock said.

The Australian Competition and Consumer Commission is investigating how banks set interest rates for depositors and mortgage holders to check cash rate increases are being passed on fairly.

Central bank officials also outlined their projections for negative equity rates under the bank’s central forecasts for easing growth and higher unemployment over the next two years.

Less than 0.5 per cent of home loans are now in negative equity, which is where a mortgage on a property exceeds its market value.

Assistant governor Brad Jones said if home prices fell another 10 per cent, the share of loans in negative equity would be 1 per cent. If prices plummeted another 20 per cent, that would rise to 4 per cent.

“A big reason for this is that loans during the pandemic were increasingly written at this quite, by historical standards, low loan-to-value ratios,” Dr Jones said.

“That has engendered a fair amount of resilience in household balance sheets with respect to their ability to withstand a decline in housing prices without falling into negative equity.”

-with AAP