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RBA governor says Aussies are ‘doing fine’. Are they?

Christmas rate hike appears unlikely

Australian families are coping “fine” with higher interest rates and despite being “very unhappy” with higher mortgage bills could still afford a fresh hike to curb inflation, according to the RBA governor Michele Bullock.

Bullock, reflected this week on the “pretty good position” Australian families are in, despite the fastest mortgage squeeze on record in 2022-23.

“We have, like other countries, raised interest rates much more quickly than we have in the past, and that has created … a lot of political noise,” Bullock told a business forum in Hong Kong.

“People are very unhappy, but what I’d like to highlight here is … households and businesses in Australia are actually in a pretty good position.

“Their balance sheets are pretty good, through the pandemic they built up large [savings] buffers … and they’re largely still intact.”

“Those who are coming off very low fixed-rate mortgages are managing quite well,” Bullock said on Tuesday.

“All the indications from the banks and all we hear from the banks is these households are doing fine.”

Another rate hike?

The comments came ahead of official data on Wednesday showing inflation eased again in October, with the headline consumer price index rising by less than 5 per cent annually.

It’s still unclear, however, whether that’s enough to prevent another rate hike, according to EY chief economist Cherelle Murphy.

“It’s clear the 13 rate hikes that have taken the cash rate from 0.1 per cent to 4.35 per cent, are working. What is less clear, is whether inflation is falling fast enough,” she said.

“Today’s data confirms governor Michele Bullock’s comments last week that inflation has enough of a home-grown element that more rate hikes would be effective in bringing it down.”

Complicated picture

The possibility of another rate rise is unwelcome news for households amid a near-record number of families at risk of mortgage stress.

But while that suggests many people aren’t coping with high rates, there appears to be a more complicated story underneath the headlines about Bullock’s latest comments on family budgets.

At first glance, the remarks appear to be out of step with reality for millions of families struggling with soaring mortgage bills, sky-high rents and double-digit increases in annual electricity costs.

But economist Nicki Hutley said the remarks reflected ongoing optimism about the RBA’s plan to curb inflation, with unemployment and rates of distressed housing sales still at very low levels.

In other words, while there is no shortage of Australians doing it tough, the nation as a whole is evidently absorbing higher interest rates without a massive spike in acute financial dilemmas.

“It’s all about how you interpret the statistics,” Hutley said.

“There are a number of people that seem to be OK, but there’s also an awful lot of people doing it tough.”

A key piece of evidence the RBA has cited is that only 5 per cent of households have seen their basic expenditure rise above their income levels, which is a relatively low proportion of people.

Source: RBA (click to enlarge).

The RBA boss has also repeatedly mentioned feedback from major banks that households are using financial buffers to absorb higher repayments, particularly those coming off fixed rates.

There’s more to the story though, with Hutley saying that the expenditure figures cited by the RBA did not include key bills such as education and private health insurance premiums.

When wider expenditure is considered, the proportion of households unable to cover their costs rises to 15 per cent.

“That’s not an insignificant number of people,” Hutley said.

While large portions of the household sector are reducing their discretionary spending in response to tight budgets, particularly young people, some households aren’t feeling the pain in the same way.

That includes many older Australians who own their houses outright and haven’t been slapped with higher housing costs, though wider inflation has still increased their living expenses.

Such a split in household fortunes was evident in recent spending data from the Commonwealth Bank. It showed young Australians are spending less on clothes and entertainment while older Australians are spending more on travel and dining out.

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