In early September 2022, Australia's central bank has been lifting its cash rate at a pace not seen in more than a decade, and the Commonwealth Bank's economists are asking whether it has been moving too fast. Their concern rests on a simple human fact: money borrowed today changes a household's budget only after a delay of months, so the full weight of each rise has not yet arrived in people's lives. Shares of the bank and the broader market have slipped together as investors weigh how hard the squeeze will eventually bite. The question now is whether patience will hold the economy steady or
CBA Economist Warns RBA May Be Tightening Too Fast as Rate Hikes Take Months to Hit Mortgage Holders
The bulk of borrowers have felt only one 25-basis-point hike on cash flow
Mark
Why does CBA's economist think the RBA is going too fast?
Mimi
Because of timing. Interest accrues about two weeks after a rate change, but the cash-flow hit to a CBA borrower takes about three months on average to arrive.
Mark
So most borrowers haven't felt much yet?
Mimi
Per Gareth Aird, most have felt only the May 25-basis-point rise, or at most that plus June's 50.
Luke
Worth noting that's CBA's own customer data. It describes its borrowers, not every lender's, and not the whole economy.
Mark
And what's the claim about December?
Mimi
That monthly cash flow pressure from rises already announced will be four times July's level for CBA mortgage holders.
Luke
That's a projection from the bank's economist, not an outcome. It also depends on the rises already announced, so it says nothing about what comes after.
Mark
What about fixed-rate loans?
Mimi
A large share expire over the next 18 months, which Aird says tightens conditions even if the RBA pauses.
Luke
He says large proportion but gives no number. We can't size that effect from this reporting.
Mark
And the share price figures?
Mimi
CBA is down 5.6% since 4 May, the ASX 200 down 6.3%. Over five years CBA is up 31% against 21%.
Luke
Those are a window choice. The start date was picked because of the first hike, and they don't show the rate rises caused the move.
Il Polso
- The Reserve Bank has raised rates four months running, and the cash rate now sits at 1.85% after a 0.5% move in August.
- CBA's head of economics warns that mortgage cash-flow pain lags about three months, so most borrowers have felt only one small rise so far.
- Bank shares have fallen 5.6% since May, slightly ahead of a 6.3% drop in the ASX 200, rattling investors who fear more to come.
- Monthly mortgage cash-flow impact is projected to quadruple by December, and many fixed-rate loans roll off within 18 months, tightening household budgets regardless of further moves.
- Markets are waiting on the Reserve Bank's next decision, with whether it slows its pace of tightening the key signal to watch.
In early September 2022, Australia's central bank has been lifting its cash rate at a pace not seen in more than a decade, and the Commonwealth Bank's economists are asking whether it has been moving too fast. Their concern rests on a simple human fact: money borrowed today changes a household's budget only after a delay of months, so the full weight of each rise has not yet arrived in people's lives. Shares of the bank and the broader market have slipped together as investors weigh how hard the squeeze will eventually bite. The question now is whether patience will hold the economy steady or whether the lag will hide the damage until it is harder to undo.
On 4 May, the Reserve Bank of Australia lifted its cash rate from a historic low of 0.1% to 0.25%, the first increase since 2010. Since then, Commonwealth Bank shares have slipped 5.6%, and the broader market has fallen slightly further, 6.3%, over the same stretch. The central bank has now raised rates four months in a row as inflation has surged back in 2022, and analysts widely expected another half-point rise on the day this piece was published.
CBA's head of Australian economics, Gareth Aird, argues the bank may be moving too aggressively. Interest begins accruing within about two weeks of a rate change, but the real pinch on household cash flow takes around three months to arrive. So most borrowers have felt the effect of only one small increase, and spending data cannot yet show what the rises have already done.
The squeeze, Aird warns, is still building. By December, the monthly cash-flow impact on CBA mortgage holders will be four times what it was in July, and many fixed-rate loans will expire over the next 18 months, adding pressure even if the central bank pauses. The open question is whether the Reserve Bank will slow down before the delayed effects reach households.
On 4 May, the Reserve Bank of Australia lifted its cash rate from a historic low of 0.1% to 0.25%. It was the first increase since November 2010, when the bank raised the rate by 0.25% to 4.75% and then held it there for most of 2011. Since the May move, Commonwealth Bank of Australia shares have slipped 5.6%, while the S&P/ASX 200 has done slightly worse, down 6.3% over the same stretch.
The central bank has now raised rates four months in a row as inflation has come roaring back in 2022. Last month's 0.5% increase took the official cash rate to 1.85%. Analysts widely expected another 0.5% rise on the day this piece was published, which would bring the rate to 2.35%. The author of the original analysis suggested a larger move to 2.5% was not out of the question, given central bankers' fondness for round numbers, though that was a personal expectation rather than a forecast from the bank.
Whatever the size of that day's decision, CBA has a warning for the RBA: it may be raising rates too aggressively because it is not accounting for the delay between a rate rise and its bite on household budgets. The argument comes from Gareth Aird, the bank's head of Australian economics, as reported by ABC News.
Aird explained the mechanics. Interest begins accruing on a lender's effective rate change date, typically about two weeks after the RBA acts, and is added to the borrower's outstanding debt. But the effect on actual cash flow is not felt for three months on average for a CBA customer. As a result, the bulk of the bank's borrowers had felt the cash-flow effect of only one 25-basis-point rise, or, as of that week, the combined effect of the May 25-basis-point increase and the June 50-basis-point increase.
That lag, Aird argued, means the economic data cannot yet show what the rises already delivered will do. It has simply been too early for spending data to pick up their impact. He saw a clear risk that the RBA keeps tightening aggressively because demand does not appear to be slowing enough to put the desired downward pressure on inflation.
The squeeze, in his telling, is still coming. By December, the effect of already announced rate rises on monthly cash flow for CBA mortgage holders will be four times what it was in July.
Fixed-rate borrowers face an even longer delay. Aird noted that a large proportion of fixed-rate home loans will expire over the next 18 months, which he said creates a natural tightening even if the RBA were to pause.
On a longer view, CBA shares have come under selling pressure this year but remain up 31% over five years, compared with a 21% gain for the ASX 200. What to watch next is whether the RBA slows its pace as the delayed repayment increases start to reach households.
Citazioni salienti
It has simply been too early for the spending data to pick up the impact of the already delivered rate hikes.— Gareth Aird, CBA head of Australian economics
There is a large proportion of fixed rate home loans that will expire over the next 18 months. This creates natural tightening even with the RBA on hold.— Gareth Aird, CBA head of Australian economics
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