Rate hikes hurt. Time to start acting like it.
So the RBA held rates yesterday. I thought they might have one more in them – like an old-school school principal who just wants to be sure that we’ve really got the message.
And just quietly, I think households do have the message. They’ve heard it loud and clear.
Because the reality is that ten rate hikes in a row are going to hurt. A lot.
In fact, Shane Oliver at AMP reckons that households are feeling more mortgage pain now than they did in the early 90s, that fabled time in economic history when rates got up to 17%.
How does that work?
The basic idea is that interest rates were higher back then, but debt levels were so much smaller.
And so if you even them out so you can compare apples and apples – and we do that by looking at principal and interest payments as a percentage of household disposable income – what that shows us is that at 20% of household income, mortgage payments are now twice what they were in the 1990s.
Twice!
Ouch.
(Did you hear that, RBA Sir? Ouch! Hearing you loud and clear.)
The puzzle here though is that even though households have welts across their backsides, they’re still out there spending it up.
Retail spending isn’t falling.
That’s normally the first thing that goes in a rate hike cycle. But not this time.
That’s a puzzle. Even retail doyen Solomon Lew can’t understand what consumers are doing. They’re a bit ‘out of control’.
And sure enough, retail sales seem to have levelled out, but they’re not falling.
So what’s going on? How do we explain that one?
The answer is the savings warchest that households built up during Covid. With money flowing about all over the place, and people unable to get out and spend, household savings rates boomed, to a record 23% of disposable income.
That’s normalised since then, but only to more normal levels.
And they were high for a long time, which meant that households were squirrelling away money like squirrels on meth.
And which is why rate hikes haven’t slowed down consumer spending just yet. Consumers have had enough in the piggy bank to keep spending elevated.
That’s a headache for the RBA.
Remember the name of the game is demand destruction. You need to destroy enough demand to slow the economy and bring inflation down.
But demand has had a six-foot high wall of money around it keeping it safe.
The RBA couldn’t touch it.
And how long does this go on for?
Well see.
The danger of course is that consumer spending doesn’t slow down, demand isn’t destroy, and inflation gets a fresh kick along.
Which will force the RBA to get Mr Rate Hikes back out of the drawer.
And nobody wants that.
JG.
RUTH says
Inflation has come from the supply side, not demand side. There is only so much Lowe and his team can do. And I’d like Chalmers to lay off while they try to do their job. Look up Chalmers’ backgound and ask yourself whether he has any suitable background to be Treasurer.
Sam says
Agreed. He just started to panick after taking over, he had no idea.