Compare the Market‘s Economic Director David Koch has urged the Reserve Bank to explain why households should pay the price for inflation he argues has been driven by increased public sector hiring, wages and spending, in a frank open letter to Governor Michele Bullock.
With economists and financial markets increasingly tipping a rate rise on 29 September, Mr Koch said many Australians would be stunned to see borrowing costs increase again after years of financial restraint.
“There’s an increasing likelihood a great many Australians are likely to be handed a bill they did not run up,” Mr Koch said. “Before the board votes, I’d ask it to look closely at who generated that worryingly high level of growth,” Mr Koch said. “It wasn’t households.”
In his open letter, Mr Koch called on Governor Bullock and the RBA board to be transparent with Australians about the role of government spending on keeping inflation elevated and why mortgage holders should be asked to carry the burden.
Mr Koch said policymakers should carefully consider where recent economic growth has come from before asking mortgage holders to absorb even higher repayments, arguing another rate rise may punish the wrong part of the economy.
“A meaningful slice of the inflation your board is trying to contain is not being generated in a shopping centre. It is being set in a cabinet room,” Mr Koch said.
“Australians have absorbed three rate rises this year, taking the cash rate to 4.35 per cent. Interest payments now consume 5.8 per cent of household gross income… higher than the 5.7 per cent peak of 1990, when mortgage rates were near 17 per cent.
“Today’s borrowers are carrying a heavier interest burden than the generation we all cite as the horror story.
“Households complied. Governments didn’t seem to. Yet only one of those two gets the higher interest rate bill.
Mr Koch urged Michele Bullock to address several key points when communicating the RBA’s next decision, including how much government spending has contributed to inflation, where the cash rate would otherwise sit, whether a fiscal statement should be signed by the federal and state treasurers, and the likely impact on Australian households.
Borrowers bracing for impact
Despite his concerns, Mr Koch said mortgage holders should expect a rate rise and take steps now to prepare their finances.
A 0.25 percentage point increase could add approximately $93 a month to repayments on a $600,000 home loan.
Mr Koch said now is the time for borrowers to review their home loans and look for savings across their household budgets.
Kochie’s tips before the 29 September meeting
Call your lender and negotiate
Many borrowers may be able to secure a sharper interest rate simply by asking.
Avoid a loyalty tax
Compare your home loan against competing offers to make sure you’re not paying more than you need to.
Build a buffer
Directing extra funds into a mortgage or offset account can help soften the impact of future rate rises.
Review household bills
Comparing insurance, energy, internet and mobile plans could free up valuable room in the budget.
Plan for higher repayments
Stress-test your finances now so you’re prepared if rates move higher.
Mr Koch said if another increase proves necessary, Australians deserve a clear explanation of what is forcing the decision and why mortgage holders are being asked to carry it.
“Households complied. Governments seemingly have not. Yet only one of those two gets the higher interest rate bill.”
“If the board must move on 29 September, please do Australians the courtesy of naming who forced your hand.”
The open letter is available here: https://www.comparethemarket.com.au/news/david-koch-an-open-letter-to-the-governor-of-the-reserve-bank/
