RBA “flying blind” as borrowers yet to feel full impact of rate hikes

The Reserve Bank of Australia has been lifting interest rates at a rapid pace this year. But a lag between each rate hike and when variable rate customers see their repayments go up means the full impact hasn’t been felt yet by borrowers.

At CommBank, which currently has a quarter of all Australian mortgages on its books, a three month delay before repayments are adjusted is typical, according to CBA head of Australian economics Gareth Aird.

“This means that the bulk of our borrowers have only felt the impact of one 25bp hike on their cash flow (or potentially as of this week the cumulative impact of the May 25bp rate hike and June 50bp rate increase),” he said.

The delay in pass-through from the RBA's May rate hike to a CBA variable rate customer. Source: Commonwealth Bank

This lag would account for the generally upbeat picture provided by the latest spending data, which is at odds with the low consumer sentiment that’s typical during times of economic shock.

“Up until July most borrowers on floating rate mortgages had felt no impact from a cash flow perspective. This enabled them to continue to spend as they were previously, thus the official spending data has been strong,” said Aird.

“The rapid pace at which the RBA has tightened policy, overlaid with a full appreciation of the lags between rate hikes and the cash flow impact on a home borrower, means there’s a degree to which the RBA Board is flying blind.”

In other words, despite having committed to aggressively lifting rates, the RBA doesn’t have an up-to-date read on how its decisions are affecting household spending, not to mention employment, wages and inflation.

“There is a clear risk that the RBA continues to tighten policy aggressively because it appears that demand in the economy is not slowing sufficiently to put the desired downward pressure on inflation,” said Aird.

“But that will occur in time as the rate hikes kick in.”

What’s more, spending will be reined in independent of any moves by the RBA as many fixed rate terms expire over the next eighteen months.

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