RBA must stay vigilant on inflation but assistant governor Chris Kent shines light on long term

Homeowners are cutting debts amid “acute” pressure on their finances as the Reserve Bank wages war on inflation.

Required mortgage payments as a slice of household income were at a record 10 per cent, assistant governor Chris Kent told the Australian Banking Association conference on Wednesday.

The comments were seen as a sign the RBA would be careful about further rate rises but came just hours before ‘shocker’ inflation data added to the case for an August move.

Mr Kent told the Melbourne audience that the level of mortgage discharges - loans closed out through property sales or full payment - had increased more rapidly than new borrowing.

That meant discharges, at $40 billion per quarter, were now running at roughly half the amount of all new loan commitments.

Households were moving to cut debts in response to higher interest rates, he said, following the RBA’s moves to aggressively lift the cash rate.

The benchmark borrowing rate has jumped by more than 400 basis points over two years to 4.35 per cent.

Mr Kent said that cash rate was below the highs of 2008, but households held more mortgage debt as a share of their income - which had drove repayments to record highs.

Payments of other household debt including credit card bills 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 and strong household savings buffers built during the pandemic.

“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.”

Mr Kent also gave some guidance on an elusive measure used by economists to judge the long term path of interest rates.

He said the official rate was about 1 percentage point above neutral, according to market consensus.

A neutral interest rate indicates the RBA was neither adding to or slowing down the economy.

A higher rate means the RBA has a tight or ‘hawkish’ policy, so is 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 3.5 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.