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The RBA acknowledges boomers win and mortgagees lose

The RBA acknowledges boomers win and mortgagees lose

Central banks across the globe find themselves in a challenging predicament, and our own Reserve Bank of Australia (RBA) faces a particularly delicate situation. In Australia, an intricate interplay of demographics and home ownership dynamics creates a paradox where those who bear the brunt of rising interest rates are not the ones fuelling the inflationary fire through their spending habits.

Unlike mortgagees in the United States, Australian mortgage holders (albeit for good reason) lack the luxury of securing 30-year fixed-rate mortgages, leaving them vulnerable to immediate shocks when interest rates surge. And they have most certainly been doing that.

This combination of factors leads to a disconcerting cycle. Affluent and cashed-up baby boomers and mortgage-free Generation X homeowners, shielded from the RBA’s rate hikes, continue to drive expenditure, exerting upward pressure on prices. Paradoxically, this compels the RBA to further raise interest rates, inflicting hardships on those with mortgages, individuals who, by necessity, have already curtailed their spending.

And their plot is made worse by the heightened interest rates which simultaneously produce even greater returns on cash and term deposits, bolstering the purchasing power of those boomers and gen-Xers unburdened by mortgages.

The undeniable truth is that the repercussions of higher interest rates and inflation do not afflict all Australians evenly. As I reported previously, recent data from the Commonwealth Bank, drawn from a staggering 7.8 million customers, confirms that individuals aged over 65 increased their spending by six per cent in the year ending on September 30, surpassing the rate of inflation. Meanwhile, those under 40 reduced their expenditures, with the age group between 25 and 29 showing the most significant decline – a particularly poignant statistic given the prevailing inflation rate of around five per cent.

We have contended that the pain borne by those directly impacted by higher interest rates may persist. Contrary to expectations of declining interest rates, we might find ourselves looking back in a year’s time and discovering that rates have remained stubbornly stable and high.

Two years!

And the probability of that scenario just gained a whole lot more traction after the Reserve Bank Governor Michele Bullock cast a gloomy shadow over the future at the Australian Business Economist dinner in Sydney on Wednesday 22 November.

Bullock noted Australia’s inflation problem has taken on a predominantly domestic character and could demand another two years to rein in. Bullock underscored the necessity for the RBA to utilize its somewhat “blunt tool” of interest rates to wrestle inflation under control, in the collective interest of all Australians.

Against the backdrop of surging prices for goods and services and highlighting a demand-supply imbalance in the economy, Bullock highlighted that everything from haircuts to dental care and dining out has experienced substantial price hikes. Bullock noted that, initially, Australia’s inflation was spurred by supply chain disruptions during the pandemic and the conflict in Ukraine. The gradual resolution of these influences has seen inflation subside from eight per cent to 5.5 per cent over three quarters.

The new challenge lies in inflation that is increasingly homegrown, and domestically demand-driven. In this context, Bullock anticipates it will take approximately two years to steer inflation back within the central bank’s target range of two to three per cent, noting it will be particularly painful for those on modest incomes. The central objective is to harmonize aggregate demand and supply, restraining demand sufficiently to achieve the target while nurturing employment growth.

The RBA has been rapidly raising interest rates since May last year, and most recently pushed the cash rate up by another 25 basis points to 4.35 per cent in November.

Without specifically calling out boomers and Xers, Bullock acknowledged the wide difference in how these rate increases are experienced by diverse cohorts in the population. Bullock also acknowledged the primary instrument at the RBA’s disposal, interest rates, is a relatively blunt tool but reinforced the RBA’s overarching goals, which are directed at the broader economy and the collective welfare of all Australians.

Already, charities are reportedly grappling with unprecedented demands as financial pressures intensify, and looking ahead, 2024 seems poised to inflict greater challenges on at least the one thirds of Australian households who have a mortgage. Anecdotally, car dealers are experiencing a pile up of stock on their lots as big-ticket items are the first to be cut when excess savings vaporise. That rationalisation of spending will continue to trickle down to lower-priced items as the longer rates remain elevated. 

Stay tuned.


Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

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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    Brads idea above has problems. Foremost of which is that those homeowners who have paid off their mortage and not subject to interest rates would mostly be retired and not attracting superannuation. So increasing compulsory super would not affect their spending.

  2. A fairer way would be a variable superannuation contribution and a base level such as the current rate being the base. So simply to curb inflation all those working would have to contribute more to super, thus spread over all those who are working. When inflation returns to target levels, the rate reverts to the baze level. It will curb spending by more people and at the end of the day upon retirement individuals receive their investment. Right now non mortgage holders with cash are benefitting but moreover the banks are the winners

    • That could indeed be beneficial…until all those with boosted super balances retire and start spending it! Contributions do jump to 12.5% in about 18 months so the impact will be observable.

  3. Change the tax system every dollar spent in Australia you give 2 cents to the government every person every company every business.everyonr spends their money in the end even if it’s your funeral.


    no mention of the impact of record immigration. Economics 101 tells us that if you add 500,000.people to.aggregate demand for limited supply then prices rise. Seems Albanese didnt learn much in his economics degree. Mustn’t have been.paying attention in class. Or hashe simply.ignored what he did learn and inflict mass hardship.on the Austn people in order to attract donations from big business for his next election campaign?.Just as Shorten did when he sold out his union.members for a donation from employers for his election campaign.

  5. You complain about savers now getting some decent interest. What about the years when they were getting virtually nothing? You talk about “high” mortgage interest rates when in reality they were unusually very low for a few years, and are now getting back to a long term normal average rate. The same for savings accounts. They are just getting back to normal. Interest rates near zero was the anomaly, not what they are now.

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