Sure, the RBA froze interest rates on Tuesday, but there’s still plenty of hurt to come

Australian Reserve Bank press pause on interest rates after ten consecutive increases on Tuesday, but for many Australians, the pain it has inflicted is about to begin.

The Bank says more than a million households will move away from ultra-low fixed rate mortgages this year and next, some of those rates are fixed at as little as 1.95%. They will be forced into loans up to 5%, meaning if they borrow $600,000, instead of paying $2,500 a month, they will pay $3,500.

That’s an extra $1,000 borrowers have to find each month — an extraordinary $250 they have to find each week. The Bank says 880,000 fixed-rate mortgages will mature this year and another 450,000 next year.

How much damage will that do to the economy? A lot. The bank said on Tuesday that the full effect of the rate hikes had “not yet been felt”.

Fixed-rate borrowers are struggling

The Bank’s research shows that fixed-rate borrowers are more likely to have larger loans relative to their income than other borrowers, and are more likely to have high loan-to-valuation ratios, in part because they tend to be more recent borrowers.

The rule of thumb is that borrowers who spend more than 30% of their income on recurring payments are at risk of payment problems. At the moment, only one in ten borrowers with a fixed interest rate is in such a situation. When those fixed loans mature and they move to the higher floating rate, that’s one in four.

That is a good reason to take stock. The Bank may raise interest rates again. It said to be expected on Tuesday. But it knows that much of the damage from what it has already done is yet to come.

After the last meeting in March, the board has a checklist of the things it said it would consider in April when deciding whether or not to hit pause. This list included inflation, jobs, retail spending, business conditions and developments abroad.

Inflation easing

On inflationsays the sign offering a range of information suggesting the rate has peaked.

The official figures only come out four times a year and the next ones will only come out in a few weeks. But since the last batch, we’ve had two new measurements of the quasi-experimental monthly index, and they’re both down.

On that monthly measure (which excludes 30% of items in the quarterly measure, including gas and electricity), inflation fell from 8.4% in the year to December to 7.4% in the year to January, to 6.8% in the year to February .

Another indication that price pressures are moderating is what unions called for in the minimum wage case before the Fair Work Commission. They did not ask for the official inflation rate of 7.8%but for 7%suggesting they accept the monthly numbers and think inflation is falling.

On employment opportunities (the second item on the Bank’s checklist), the official figures in February showed an increase after declines in December and January, but the Bank says this is more likely to reflect changing seasonal hiring patterns than a real increase. There have been vacancies traps for six months.

Economy weakening

Retail Expenses (the third item on the checklist) grew by just 0.2% in February, far less than the 0.6% price growth, at a time when Australia’s population was growing rapidly, suggesting that what was bought per person was declining went. ANZ map data for the first two weeks of March shows a further weakening.

The Bank says the combination of higher interest rates, cost-of-living pressures and a fall in house prices is leading to a “significant slowdown in spending”. While some households have a savings buffer, others are experiencing “painful strain on their finances”.

Read more: The Lowe Road – the RBA enters a ‘narrow path’

Business Terms (the fourth item on the checklist) remained healthy in February according to the National Australia Bank survey, although confidence slipped into negative territory (meaning pessimists outweighed optimists).

At last reading, Australia’s overall economy was so weak that gross domestic product (expenditure and income) was just growing 0.5% in the three months to December about as much as the population, meaning that GDP per person has not grown.

The Bank says it expects “below trend” growth for the coming years.

Overseas headwind

Foreign developments (the last item on the checklist) have been grim since the last board meeting.

The Bank says the international outlook is “moderate” with likely below-average growth in coming years, weighed down by banking crises in the US and Switzerland.

Lowe’s moment of truth

Governor Philip Lowe will National Press Club on Wednesday.

It’s probably his last chance to explain what he’s doing before Treasurer Jim Chalmers’s report independent review from the Bank which he received in March.

That report likely suggests major changes in the bank’s organization (such as more experts and fewer business people on the board) and a more open culture.

But as a sort of justification for Lowe, it will find little reason to change the Bank’s goals (2-3% inflation and full employment) or the only tool it uses to achieve them, which is to adjust the so-called cash rate.

After Chalmers makes changes as a result of the revision, the bank will likely continue to try to do what it’s trying to do now, which is to use monthly (or perhaps less frequent) spot rate revisions to get inflation and employment. somewhere close to where he wants them. It won’t be easy.