Financial conditions are tight for households but recent data has reinforced the need to be vigilant about inflation, Reserve Bank assistant governor Chris Kent says.
Mr Kent spoke at the Australian Banking Association conference in Melbourne on Wednesday morning, just hours before new monthly consumer price data is to be released.
“We know that many are feeling a painful squeeze on their finances because of higher interest rates,” Mr Kent said.
“High inflation, though, has also reduced people’s purchasing power.
“It has adversely affected all households, but especially those on lower incomes.”
At 4.35 per cent, the benchmark cash rate has rocketed from the emergency lows of 2020 to 2022.
Mr Kent said the official rate was about 1 percentage point above neutral, according to market consensus.
A neutral interest rate would indicate the RBA was neither adding to or slowing down the economy.
A higher rate means the RBA has a tight or ‘hawkish’ policy, so interest rates are weighing on demand as the central bank fights to smash inflation.
The comments are a signal that the Bank thinks a long-term, stable cash rate could be about 3.25 per cent, but only once inflation is firmly and permanently back in the 2 to 3 per cent target band.
But Mr Kent noted that the so-called “neutral rate” was tough to measure and would constantly change.
Australia’s jobless rate is still just 4 per cent and the economy has so far defied warnings growth would go backwards, adding to the case for the RBA to keep a hawkish eye on prices.
The cash rate is also still well below its 2008 level of 7.25 per cent.
Yet household mortgage debts were now higher, Mr Kent said, and so mortgage payments had hit a record 10 per cent share of disposable income.
Scheduled debt — which includes credit card bills — payments had increased sharply although were below the level prior to the Global Financial Crisis, he said.
Borrowers were feeling the pressure “acutely” but nearly all were paying debt on time, Mr Kent said.
That was helped by the strong labour market, with unemployment just 4 per cent, and households building strong savings buffers during the pandemic.
Source Agencies
