Over the last year, the Reserve Bank has implemented a series of interest rate increases, which is considered to be the most aggressive in decades. This has resulted in 11 official rate hikes. However, borrowers may not have fully experienced the impact of these increases in their bank accounts yet, due to the time lag involved in monetary policy when adjusting interest rates.
Historically, there has always been a time lag between the Reserve Bank adjusting interest rates and banks raising minimum loan repayments. However, this time around, the process of passing on higher interest rates to the household sector has been exceptionally prolonged. Consequently, it is taking longer than usual to observe the effects of interest rates on the economy and household expenditure. Recently released financial reports from prominent banks indicate that there has been a significant delay between the announcement of interest rate changes and the implementation of increased repayments.
It was reported that out of 11 interest rate rises, only 8 had resulted in higher mortgage repayments at Westpac. National Australia Bank also confirmed that it expected rate increases to be passed on to customers in the upcoming months, and that the increase in repayments would become more significant. The delay in passing on rate rises can take several months, and this has implications for the economy. Although banks usually announce their response to RBA rate announcements within a few days, the higher rate does not take effect for another week or so, and the increase in minimum repayments takes even longer to come into effect.
Banks need to evaluate the impact of rate changes on minimum repayments for each loan, which can be affected by whether customers have made payments ahead of schedule. Once banks determine the need for an increase in minimum payment, they usually provide customers with a month’s notice before implementing the change. Due to these factors, it typically takes two to three months for customers to experience the effects of a rate increase by the RBA. Additionally, a surge in fixed-rate lending during 2020 and 2021 has also contributed to the delay in households feeling the full impact of rate rises. Many Australians took advantage of the low cash rate and secured affordable fixed-rate loans, which have not yet expired.
Due to the high number of fixed-rate loans written in 2020 and 2021, customers are currently shielded from the full impact of rate increases. It is estimated that only 70% of the increase in interest rates has been experienced by mortgaged households so far. Monetary policy has always been known to have long and variable lags, but this cycle of rate rises is experiencing even greater delays. As a result, it will take longer than usual to determine the extent of the impact on households and the economy. Economist Carlos Cacho notes that the delays are larger this time around.
The information provided is general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances. Your full financial situation will need to be reviewed prior to acceptance of any offer or product. This article does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.