1 million borrowers face fixed-rate cliff: RBA

During his recent address to the House of Representatives standing committee on economics on 11 August, marking the conclusion of his governorship, Mr Lowe reflected on his extensive career at the Reserve Bank of Australia (RBA), particularly his role as governor since 2016.

He acknowledged his team’s dedication to economic policy but also admitted a lack of full comprehension regarding “the implications of the pandemic a bit more”, alluding to the RBA’s earlier projection of prolonged low interest rates until 2024.

“We certainly didn’t expect to get to this position. We didn’t expect it. Financial markets didn’t expect it. Other forecasters didn’t expect it,” Mr Lowe stated.

However, the persistence of inflation around 6 per cent, greater than expected, prompted the central bank to respond swiftly by raising interest rates to 4.1 per cent.

As such, the high volume of mortgage holders who locked into record low rates during the pandemic (around 2 per cent) have been forecast to roll over onto variable rates (around 6 per cent) this year – a transition closely monitored by the central bank.

Mr Lowe noted that about 1 million borrowers have successfully transitioned from their fixed-rate loans to variable loans without defaulting on payments.

He projected that another 1 million borrowers would undertake this transition over the next 18 months.

“We know from the banks that the million that have transitioned haven’t fallen behind on their housing loans in any greater rate than people with variable rate loans,” Mr Lowe emphasised.

He attributed this smooth transition to widespread awareness and market dissemination of information.

“This transition from a low fixed rate loan to a renewal rate loan, has been the most telegraphed increase in mortgage repayments ever, borrowers have known this is coming,” Mr Lowe said.

“And people – not everyone – have prepared for it.

“In the lending market, brokers have played a really good role in finding people the best deal.”

However, he observed that a similar framework was lacking in the deposit market, potentially paving the way for enhanced transparency through open banking.

Consequently, he urged all Australians to prompt competition among banks.

“I encourage you to shop around and make them work harder for your money. And some will pay you more than 5 per cent. We want the banks to compete hard for our money. And we have a role in making them compete,” Mr Lowe said.

Inflation persists

While acknowledging the challenges posed by high interest rates and financial pressures on mortgage holders, Mr Lowe asserted that the economy was in a “reasonable place” and emphasised that the situation would be far worse if high inflation persisted.

“High inflation is corrosive to the healthy functioning of the economy and it makes life more difficult for everybody, especially those on low incomes,” he said.

While inflation had come down from its 7.8 per cent peak, it remained high and historical consequence of high inflation could lead to even higher interest rates and unemployment.

“It is for these reasons that the Reserve Bank Board remains resolute in its determination to return inflation to the 2–3 per cent target range,” Mr Lowe said.

“Looking forward, it is possible that some further tightening of monetary policy will be required to ensure that inflation returns to target within a reasonable time frame.”

As Mr Lowe prepares to step down from his position, with deputy governor Michele Bullock set to assume the role from 18 September, he expressed anticipation for “returning to be a private citizen again.”

[Related: Cash rate remains at 4.1% in August]