AOn Monday, Australian Philip Lowe announced that he would visit the support group for those at risk of suicide. Not out of pure compassion, but in his professional role: The governor of the Reserve Bank of Australia (RBA) says he gets letters every day from desperate people who are suffering from the ever-rising interest rates on loans. Suicide Prevention Australia had sounded the alarm because more and more people on the fifth continent could no longer afford the dramatic increase in their interest rates on loans. The cost of living rose too much, the flexible interest rates for real estate would then do the rest.
Meanwhile, 46 percent of people in the organization reported tremendous financial stress. On average, Australian home loan repayments are expected to be around a record high of 9.5 percent of disposable income this year. Always friendly and concerned, Lowe has long been hesitant when it comes to interest rates. Although he almost dutifully warned of inflation on Wednesday in Sydney: “An economy with a high inflation rate does not work well. Business people are less able to plan, people spend more time protecting themselves from inflation instead of doing productive work.” In short: it only leads to a catastrophe of “unemployment and even higher interest rates”.
The inflation rate in the number 13 of the world’s major economies is currently 7.8 percent. On Monday, the central bank raised interest rates by a further 0.25 percentage points. Since May last year, the central bankers have raised the key interest rate in ten consecutive steps by a total of 325 basis points to the highest level since May 2012. If the commercial banks pass on the increase – which they are quick to do in Australia – the interest burden for a 30-year real estate loan of 640,000 Australian dollars (400,785 euros) has risen by almost 1,200 dollars a month within ten months. Middle-class households can no longer compensate for this increase by cutting back on consumption.
Australian Dollar Loses Against US Dollar
That is why the Australian governor, just hours after his counterpart Jerome Powell declared for the American Fed that the key interest rate must continue to rise, was much more cautious in public: His board is going “completely open” to the April meeting of the central bank, Lowe said: “We are approaching the point where it will be appropriate to pause interest rate hikes to give us more time to assess the health of our economy.” Markets took the message immediately, with the Australian dollar falling for the first time in over a month the 66 cents for an American dollar, because the facilities on the other side of the Pacific bring more. The ASX stock index lost a percentage point during Lowe’s speech at the Australian Financial Review economic summit.
The central bank will now look at four indicators in particular: the employment rate, monthly inflation, spending on consumption and reports on the business climate. The Central Bank Council was already amazed that the unemployment rate rose by 0.2 percentage points to 3.7 percent in the holiday month of January. With the end of the pandemic, 400,000 workers flocked to Australia again last year, and analysts at Bank Westpac estimate that there will be another 350,000 this year. This allows the industry, which is actually desperately looking for workers in Australia, to boost its production.
Moderate wage increase
Above all, wage growth is only 3.3 percent, so Lowe considers a wage-price spiral to be unlikely. Of course he cannot guarantee it, but he assumes that inflation can be pushed back into the target corridor of 2 to 3 percent by around 2025, said the Australian. However, he once made a terrible mistake with the unforgotten and incorrect prediction that the key interest rate would not rise until 2025 – this confession is what prompted some Australians to take out a loan in the first place. On Monday he had stated that he assumed that the inflation rate had passed its peak. However, people are becoming more cautious about believing the words of the dovish central bank governor.
It took even more to pause interest rates: The current key interest rate of 3.6 percent is around one point below that in the comparison countries New Zealand, Canada and the United States. Therefore, despite Lowe’s declared reluctance, many analysts still expect the key interest rate to be raised to 3.85 percent in April.
However, more and more Australians find this unacceptable: “Statistically speaking, about one in five Australians turns to us for help. It is good that people are heeding the message. But it is putting pressure on the already overburdened frontline suicide prevention services,” warned Suicide Prevention Australia chair Nieves Murray. The National Australia Bank said two in five Australians felt “financial stress” in the last quarter of last year.