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I was late to the party, but “I’ve got to contain inflation”

I was late to the party, but “I’ve got to contain inflation”

“I’ve got to contain inflation. I’ve got to convince the community that we’re serious about that.  That’s our job and its unpopular and I accept that”. Philip Lowe, Governor of the Reserve Bank of Australia.

Commencing on 6 October 2021, the Reserve Bank of New Zealand has increased their official cash rate on 10 separate occasions to 4.75 per cent.

Commencing six months later, on 6 April 2022, the Reserve Bank of Australia has increased their official cash rate on 9 separate occasions to 3.35 per cent. The consensus view is to expect at least another two increases of 0.25 per cent each, taking the Australian official cash rate to a minimum of 3.85 per cent.

Wespac (ASX:WBC) has just announced that 45 per cent of their (mortgage) loans that were originated in the three years to June 2022 – for a value of $212 billion – will breach the Bank’s “serviceability buffers”. 

While bad debt provisions are a backward-looking indicator, this data is likely to get worse over the medium term due to the pronged fixed rate refinancing “cliff” with $56 billion of WBC’s fixed loans expiring in the second-half of 2023, $57 billion expiring in 2024 and $30 billion expiring in 2025.

The Commonwealth Bank of Australia (ASX:CBA), at their recently released interim results, highlighted that 17 per cent of their $482 billion mortgage book, or $82 billion of low-rate fixed loans, would roll off in 2023 and the same value would re-set in 2024 and 2025.

Across WBC and CBA that is over $300 billion of mortgage loans reset to a variable rate of interest over 2023-2025. And if we assume this figure approximates $600 billion for the Australian Banking Sector, we estimate it is 7 per cent of the value of Australian residential property of $8.5 trillion, assuming a 12 per cent decline from its peak.

As an example, by December 2023, 83 per cent or $400 billion of CBA’s mortgage book would be exposed to variable interest rates1. And relative to the 0.1 per cent RBA official cash rate of 12 months ago, a forecast 3.85 per cent official cash rate – assuming a home loan with a 30-year term – would increase by around $9,500 per annum on a $380,000 of mortgage, or $19,000 p.a. on a $760,000 mortgage, or $28,500 on a $1.14m mortgage.

Together with the other cost-of-living increases, it is expected those companies exposed to discretionary expenditure will likely see a relatively younger cohort of customers reining in their expenditure over the medium-term. 

1 Please see Slide 83.

The Montgomery Funds own shares in the Commonwealth Bank of Australia. This article was prepared 22 February 2023 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade the Commonwealth Bank of Australia you should seek financial advice. 


Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. Hi.

    I have come
    To realise my criticism of the RBA was a little mis founded.
    Monetary policy can only ever react in retrospect to
    Fiscal policy.

    The massive government spending (see stimulus) by not just federal
    Governments but states also is the major cause of the inflation.
    While interest rates are still relatively low in historical sense the capital.
    Markets are different today .as in no where near as big and complicated as they where in previous stages of history.
    Governments have privatised an endless list of government services and utilities, which reality is biting them now,and the public.
    (private organisation s do what they do best as in make money .)
    The inflations baked in , toll roads a classic example .
    As others are also easily identified.
    Governments have to have some
    Sort of responsibility to help as in temper spending .
    History in Roman times shows that when governments become the economy,it’s only ever ends in disaster
    Ben Lebsanft

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