“It’s looking really ugly over time. People who have borrowed a lot on the expectation that interest rates won’t go up are going to be burned,” Anthony said.
“Monetary policy has been used to kick the can down the road but it’s come to an end. Now there is a choice between sky-high inflation or sky-high asset prices, and the asset prices are the ones that have to come to an end.”
Commercial banks have already detected surprise among many customers, most with extremely large mortgages, that interest rates have gone up.
Many customers did not expect interest rates, which the RBA has increased at its past two meetings and is likely to lift by another 0.5 percentage points in early July, would increase at all. Before this year’s increases, interest rates had consistently fallen since 2010.
The Bank for International Settlements (BIS) this week used its annual report to warn the world faced an outbreak of stagflation as central banks lifted interest rates in response to soaring inflation.
It said governments had relied on budget deficits and ultra-low interest rates to generate economic growth when instead they should be looking at major structural reforms.
“For far too long, there has been a temptation to turn to fiscal and monetary policy to boost growth, regardless of the underlying causes of weakness,” it said.
HSBC Australia chief economist Paul Bloxham said there was now a growing risk of a local recession.
He said while households had increased their savings by $250 billion through the COVID-19 pandemic, an expected fall in property prices and higher interest rates might lead to consumers reducing their expenditure.
“Many households may choose to use their excess savings to pay down their higher debt, or continue to use it as a buffer against higher mortgage rates,” he said. “Although it is not our central case, high inflation and rising interest rates mean an increasing risk that Australia’s economy faces a recession in the next 12 to 18 months.”
Finance Minister Katy Gallagher said there were challenges for both the budget and the broader economy.
“We have a really unique set of circumstances at the moment and challenges. We’ve got cost of living going through the roof, we’ve got rising interest rates, we’ve got wages still stagnant, and that’s presenting some real challenges to people,” she said
“The job for budget repair has to be done. I mean, it’s not one that we can just leave and hope that things get better in the long run, there is a structural deficit that our budget’s facing.”
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