Home Financial Record RBA scenario means record costs: UBS

RBA scenario means record costs: UBS

0

UBS predicted that the Reserve Bank of Australia’s (RBA) rate hike assumptions would lead to an unprecedented surge in payments for households.

The RBA’s scenario of a 300 basis point increase in interest rates by mid-2023 would see interest payments as a share of household income rise from 3.9% of income in the first quarter of 2022 to 9.3% in the fourth quarter of 2023, UBS said.

While interest charges increased more during the 2002-08 tightening cycle (7%), the adjustment was much slower over six years. Thus, the RBA’s scenario (based on market prices) suggests a record rapid increase of 2.5% year-on-year, UBS added.

However, as previously reported Financial standardRBA Deputy Governor Michele Bullock said households are in a fairly good position to weather rising interest rates.

Indeed, “much of the debt is held by high-income households who have the capacity to repay the debt,” Bullock said.

Meanwhile, RBA Governor Phillip Lowe stressed that the RBA was not on a predefined path to achieve neutrality and would instead maintain a flexible inflation targeting framework.

Yesterday Lowe said: ‘We don’t need to bring inflation back to target immediately because we have long had, for good reason, a flexible medium-term inflation target.

“But we need to chart a credible path back to 2-3%.”

Lowe said the RBA was looking for ways to return to the target range in which the economy continues to grow and unemployment remains low. However, he conceded that the road ahead is narrow and clouded by uncertainties.

Lowe went on to admit that he can understand why some people might conclude that too much support has been provided by governments and central banks. Although to his critics, he said to remember the context in which the support was provided.

“At the time the decisions were made, the outlook was dire,” Lowe said.

“In Australia, tens of thousands of people were expected to die, our hospitals were expected to overflow, many people were expected to lose their jobs and deep social and economic scars were anticipated.”

Lowe continued, “In this environment, the RBA had a strong insurance mentality.”

“A lot of other central banks and governments had a similar mindset.”