15% of variable-rate borrowers face negative cash flow: RBA

The central bank has noted that mortgage repayment pain is being felt by borrowers but added that this tightening is necessary to curb persistent inflation.

Speaking to the Senate economics legislation committee on Wednesday (31 May), the governor of the Reserve Bank of Australia, Philip Lowe, and assistant governor (financial system), Brad Jones, acknowledged the “pain” that rising rates are causing mortgagors.

Noting that the cash rate had risen 11 times in the past year (with economists expecting more to come) as the central bank works to bring inflation back down to its target range of 2–3 per cent, Mr Jones conceded that the lowest income earners are feeling more pain than higher income earners.

He explained that almost half of the borrowers in the lowest-income quartile are now “having to devote around a third of their incomes to mortgage payments”, while those in the upper-income quartile are devoting around 5 per cent to repayments.

“So it’s very uneven experiences being felt very unevenly across the community. That’s something we’re very conscious of and we monitor a range of data to that effect,” he said.

Mr Lowe added that bank data showed that lower-income earners who are renting and those who’ve taken out a loan in recent years are slowing down their spending much faster than owner-occupiers who are paying down their debts.

However, he added: “Inflation affects everyone, but if you’ve got a smaller buffer and on a lower income and smaller margin and free cash, then obviously it’s much more painful than [it is for] a very wealthy person with a lot of money in the bank.

“But everybody is being hurt by the fact that prices went up 7 per cent last year, and that particularly hurts low-income earners.”

The senators also asked the central bankers whether they concurred with recent Deloitte Access Economics forecasts that suggest that approximately 300,000 Australians are currently experiencing negative cash flow.

While Mr Jones said “everyone who’s looking at these different data sources arrives at slightly different numbers”, he revealed that RBA modelling has shown that “something in the order of about 15 per cent” of Australian variable-rate owner-occupied borrowers are likely to be experiencing “negative income surplus” by the end of this year unless they make “adjustments”.

According to the assistant governor (financial system), these adjustments could include cutting back on some discretionary consumption or working more hours.

“So, if they just held everything constant, it’s about 15 per cent of variable rate owner-occupied borrowers, by the end of this year, would likely have negative cash flows … But that presumes they don’t make any adjustments to their living circumstances,” he continued.

“I think the experience would tell us that they will make some adjustments; principally, they’ll pull back on consumption.

“We know that inflation is a very regressive tax that hurts those on lowest incomes the most. So, if inflation were to increase further, or at a faster rate than our forecasts, that is going to eat into the spare cash flows of Australian households more generally.”

Mr Lowe said this therefore underlined the central bank’s commitments to hike rates and bring inflation down.

“Some people say: ‘Well, don’t increase interest rates because it’s hurting’. But if that was our approach, inflation would stay high for longer, which would mean higher interest rates, fewer jobs and it would hurt lower-income earners most,” Mr Lowe said.

“So, we’ve got to do what we’ve got to do to make sure prices aren’t rising by 7 per cent, because it hurts people.”

The RBA will meet next Tuesday (6 June) to determine the cash rate setting for the month, with several economists suggesting that the higher-than-expected inflation figures for April could force the RBA to raise rates again.

[Related: April inflation data weakens RBA outlook: Economists]