Neale Prior: Coffees and a couple of pints a small price to pay for the RBA moving early to fight inflation

WA homeowners should prepare to have $14 less to spend each week thanks to the Reserve Bank of Australia lifting official interest rates on Tuesday. It is the price everyone with a home loan will have to pay to keep Australia economically strong. Sadly, it will be one that a minority will be unable to afford. Those kindhearted souls at banks and other financial institutions will quickly increase variable home loan rates by the same overnight cash rate margin agreed by the RBA’s board. While a causal link between this inter-bank lending rate and mortgage rates is peripheral at best, history tells us that banks do not hesitate to supposedly “pass-on” at least the full percentage-point increase to their customers. This will mean the average variable interest rates charged by banks will likely rise from an average of about 3.3 per cent to at least 3.55 per cent. Mortgage repayments on a 25-year, $450,000 loan will likely rise from about $508 a week to around $522 a week if the average variable rates are lifted to 3.55 per cent. Someone up to their eyeballs with a $900,000 mortgage would see their payments rise from $1017 to $1045. Having $14 — or even $28 — less cash available each week is naff all for most people doing fine in these boom times. Maybe a couple less coffees or a few less pints of beer will be good for the body and mind. But let’s not forget that anyone paying a 3.3 per cent variable rate in this market is probably being ripped off or is not in a strong enough financial position to get a better deal. People doing it tough will tell you that $14 more going out every week quickly morphs into more than $700 a year — a lot of money when you’ve got none. These are the people who will be most vulnerable should the banks choose to use the latest official rate increase as an excuse to increase variable rates to less mobile customers by more than 25 basis points. But for better or worse, we have a retail banking, bankruptcy and welfare system to help people who cannot live with a small rise in interest rates. The nation needs economic settings that foster growth and reduce long-term threats. Most of us should be grateful that we have a RBA that has moved early to curb the real threat of inflation — something that could turn Australia’s economic success of the past 30 years on its head. The 25 basis point rise is the standard rate shift used over the years by the board and signals that it is taking a decisive but clear-headed approach to returning inflation to its 2 to 3 per cent target range. “The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time,” RBA governor Philip Lowe said in his post-meeting statement. “This will require a further lift in interest rates over the period ahead. “The board will continue to closely monitor the incoming information and evolving balance of risks as it determines the timing and extent of future interest rate increases.” This is a promise that any future rises be based on the evidence emerging as the world grapples with war in Europe, a blow-out in global shipping costs, increased militancy in China and, lest we forget, that pesky bug called COVID-19. We need the RBA to get its decisions right in this new reality. Paying $14 extra on a mortgage is a small price for most of us to pay.