Fresh calls for the Reserve Bank of Australia to lift interest rates to 4.6pc thanks to strong jobs market

The Reserve Bank is facing new calls to hike interest rates again after its own figures showed the lowest-paid Australians have had a 10 per cent lift in real incomes.

But other economists have said the RBA has already stretched borrowers enough — shown by its financial stability review released on Friday which revealed 14 per cent of past and 10 per cent of current fixed-rate borrowers faced mortgage repayment hikes of more than 60 per cent.

A “small but rising share” of borrowers were on the cusp or in the early stages of financial stress, the RBA said, with the share of borrowers falling behind on mortgage repayments picking up from a low level.

Financial stress did not vary much across Australia, it said, despite borrowers in some regions having seen larger increases in loan payments.

Deutsche Bank Phil O’Donaghoe said the review showed the national labour market was too strong for the RBA to get inflation — now at 5.2 per cent — back to its 2 to 3 per cent target, and two additional hikes this year were needed.

This would push the cash rate up to 4.6 per cent — a staggering 4.5 percentage point increase since the RBA began hiking in May last year.

The RBA noted that more Australians than ever were in paid work, increasing hours or jobs in general, with strong growth in nominal income.

“The fact that Australian households have been able to respond to cost-of-living pressures by increasing their supply of labour and generating stronger incomes suggests the labour market is too strong to meet the RBA’s goal of slowing inflation back to target,” Mr O’Donaghoe said.

“The RBA cash rate is too low.”

But AMP chief economist Shane Oliver said rising levels of cash-flow negative households, rising mortgage stress and and shrinking savings buffers, shown by the review, were worrying.

“(They) warn that the RBA needs to tread very carefully ... we would conclude (they) are more consistent with the RBA not raising rates again,” he said.

The bank notes borrowers most at risk if unemployment rises — which is its central forecast — are those who have most recently taken out mortgages because they’ve had less time to reduce the size of their loan and build up savings buffers.

The share of borrowers with fixed rates soared between late 2020 and mid 2022 as the Reserve Bank slashed the cash rate to a record low of 0.1 per cent. It had already been below one per cent from mid-2019.

“Most fixed-rate borrowers are estimated to have sufficient incomes to meet their higher mortgage payments and necessary expenses,” the bank said.

The majority of borrowers not on fixed rates had seen repayments increase between 30 and 50 per cent since April 2022. The share of variable rate owner-occupiers devoting at least one-third of income to repayments has increased from about 4 per cent to about 20 per cent between April 2022 and July 2023.

“The incidence of severe financial stress has increased but remains low,” the review states.

Those most at risk of financial stress were those with larger loans relative to income or relative to the value of their property, with other groups — including those who borrowed at low rates during the pandemic and now on much higher rates — not appearing to be materially more at risk, the RBA assessed.

Despite the increase, the RBA noted the vast majority of household borrowers had continued to service their debt despite a slight uptick in arrears and personal insolvencies.

“Borrowers have been more resilient than expected in their ability to service their debt, given the sharp rise in interest rates,” it said.

This was largely due to cuts to spending, using accumulated savings and the strong labour market, with more Australians than ever in work.

While many households had been able to use large savings buffers amassed during the pandemic to fund higher mortgage payments, the bank said, the flow of new savings had slowed recently.

But spending cuts may not be enough for some, the bank warned.

“Some households may find it increasingly difficult to cut back further on consumption as they have already reduced their discretionary expenditure substantially.”

Renters were more likely to experience financial stress than other households, the bank noted, but they did not pose direct financial stability risks because they didn’t have material debts.

“If a large number of renters were to default on their rental payments, this could adversely impact the cash flow of investors, particularly those who financed their investment property with debt,” the RBA said.

Treasurer Jim Chalmers said the report was an important reminder of ongoing pressures facing the global economy and financial system.

“In the face of the challenges coming at us from around the world, Australia’s resilient labour market and well-regulated financial system are among our strengths,” he said.

“We know Australians are doing it tough and higher interest rates will continue to bite, particularly as more and more households come off lower fixed-rate mortgages.”