Reserve Bank to keep interest rates on hold but many more ...

The Reserve Bank of Australia will hold a meeting today — the first to be chaired by new governor Michele Bullock – and economists and markets are widely tipping that it will keep interest rates on hold.

For the time being, millions of home owners will be spared another punishing rate hike, but this is not the end of increasing pain for a growing cohort of Australians.

The central bank has left the door open for further interest rate rises later this year, depending on what happens to inflation over the coming weeks.

Some fear this "higher for longer" interest rate environment that central banks have warned of could mean we soon hit a breaking point.

The strain from interest rate hikes is already starting to show, with RBA data this week confirming that more Australians are being pushed into financial hardship, which could worsen in the coming weeks and months as another 550,000 Australians roll off fixed mortgages and onto higher variable rates. 

RBA's Michele Bullock is expected to leave rates on hold at her first meeting as Governor on Tuesday. (AAP: Mick Tsikas)

New data from the RBA – released this week under a Freedom of Information request by The Australian newspaper — suggests that more Australians are using credit cards to cover the rising cost of rent, petrol, electricity, gas and insurance.

The RBA documents reveal the National Debt Helpline is receiving more calls from people who have never previously experienced financial hardship or drawn on social services.

Following a meeting with helpline representatives, an internal RBA email in July said the agency "reported a significant number of callers experiencing hardship who are accruing additional debts via credit cards, Buy Now Pay Later, borrowing from friends and family, and increasingly unpaid obligations to the ATO, their utilities providers and council rates".

But it noted that many callers were "gainfully employed" and that "examples were given of mortgagees on six figure salaries residing in prosperous suburbs of Sydney".

"This new cohort of 'solid middle to upper income' callers was on top of the more familiar cohort at the lower end of the income distribution who had more often required (or been close to requiring) the help of financial counsellors and social service," the RBA email said.

Lag between higher rates and home loan defaults 

There's a long lag between people first experiencing financial stress and it leading to loan arrears, as Australians do whatever they can to hold onto their homes.

"For cultural and legal reasons, Australian borrowers place an extremely high premium (more so than elsewhere) on meeting the commitments they have with their mortgage lenders," the RBA email said.

"They will typically avail of every option available to them — legal or otherwise — prior to selling their home or moving into foreclosure."

Representatives from the helpline also told RBA assistant governor Bradley Jones that underinsurance of homes, cars and personal belongings was an increasing problem, while "some borrowers were asking about how they could qualify to tap into their superannuation balances".

For those thinking that the end of higher interest rates is near — at the start of the year most economists were betting there would be rate hikes in early 2024 — the expectation now is that rates will, as the US Federal Reserve indicated following its September meeting, stay "higher for longer".

While all four big bank banks are forecasting a hold on Tuesday, National Australia Bank predicts another hike next month following the quarterly inflation figures. NAB tips the RBA will lift rates (from 4.1 per cent currently) to 4.35 per cent in November.

Some fear the "higher for longer" interest rate environment could see more households tipping into mortgage stress.(ABC News: John Gunn)

Threat of high inflation, recession looms

A major reason why economists are betting there will be at least one more rate hike and no cuts until later next year is because of the threat of higher-than-expected inflation. 

Data released on Monday by CoreLogic suggests that the property market has held up due to higher migration. Australia's housing market is only 1 per cent below the previous high in April 2022.

In August, inflation data showed the annual pace of inflation rose to 5.2 per cent. While core inflation, the RBA's preferred measure, held at an annual rate of 5.6 per cent, it is still well above its 2 per cent to 3 per cent target.

And, as the oil price nears $US100 a barrel, the pain of higher petrol prices is also weighing on the minds of central banks.

Some economists, such as AMP Capital's chief economist Shane Oliver, also reckon there's still a 50 per cent chance of a recession.

This week the Australian Financial Review (AFR) released its survey of 42 economists. It suggests the RBA will not start cutting interest rates until August next year.

Late last year, the AFR survey had forecast the first monetary easing in February next year.

If the cash rate were to rise for a 13th time in this current cycle, the average borrower with a $500,000 loan at the start of the hikes could be paying a total of $1,210 more a month on their mortgage, RateCity's Sally Tindall says.

Sally Tindall says households are feeling the pain of higher rates and it will get worse as more people roll off fixed rates.(ABC News: John Gunn)

About 550,000 Aussies still to come off fixed rates 

According to RateCity.com.au analysis of Reserve Bank and big bank data, 730,000 mortgages have already come off their ultra-low fixed rates this year, with about another 150,000 still to come off this year.

RBA data shows there were 590,000 mortgages that came off fixed rates in 2022, and there will be 880,000 in 2023 and 450,000 in 2024.

While the unemployment rate is expected to tick up in the coming months, so far, most Australians have managed to keep steady incomes that mean they don't default on their home loans.

The RBA's emails point to the risk to the economy if borrowers' income position changes (in that they lose their work hours or jobs and/or their expenses shoot up even further).

"Borrowers with a high repayment burden are not necessarily in financial stress presently but would be at risk of becoming stressed if they suffer unexpected shocks to their income or expenses," the RBA warns.

The central bank is now moving cautiously and, in its emails, it notes: "We need to be reviewing a wider range of 'leading edge' data to better understand how arrears and NPLs [non-performing loans] and household consumption could evolve in the period ahead".

On Friday, the Reserve Bank will publish its six-monthly Financial Stability Review, which will provide a better gauge of the level of financial stress being experienced by Australian households.

It's fair to assume that review is not going to be painting a pretty picture, with many more households at risk of hitting their breaking point.