Australian Leading Financial Expert Calls For Better Solutions to Inflation

Reserve Bank of Australia Governor Philip Lowe has announced the 12th interest rate hike in June 2023 over last 13 months. (Peter Parks/Getty Images)

One of Australia’s leading financial experts, Mark Bouris, has called for better solutions to tame high inflation, expressing deep concern following the RBA’s June interest rate hike.

In a piece published in news.com.au, the executive chairman of Yellow Brick Home Loans has asked for an explanation of the central bank’s latest decision to institute the 12^th rate increase in the past 13 months, which has seen the official cash rate up by another 25 basis points to 4.1 percent.

“Why on earth do we need further interest rate hikes when inflation is already trending down, and households are already in stress?” Bouris asked.

“And why do we need further rate rises when it’s unclear whether interest rate hikes are able to address the inflation problem at all?”

Vulnerable Households and Small Businesses are Hurt

Bouris argues that inflation in April was trending down for the first time in the past year; if the volatility of the data is excluded. He also noted that the monthly inflation rate has gone from 1.6 percent to 0.3 percent.

This means inflation was only 3.6 percent in April on an annualised basis, which he believes should have convinced RBA to hold the June rate steady.

He is concerned that the extra pain the further rate hike inflicted on already stressful households and businesses will send the economy into a recession.

“Every day, more and more Aussie mortgage holders move from low fixed rate mortgages taken on during the pandemic to high variable rate mortgages,” he said. “That means hundreds of thousands of mortgage holders are seeing their payments go up by more than 50 percent overnight.”

The impact on small businesses has also been profound.

“Business owners tell me their customers have reduced their spending as their household’s budgets are constrained by higher monthly mortgage repayments,” he added.

“Meanwhile, higher rates have made it more expensive for businesses to borrow or service their current debts.”

According to S&P Global Ratings’ RMBS Performance Watch: Australia report, rising interest rates and cost-of-living pressures were weighing on home loan serviceability.

Prime mortgage arrears rose to 0.95 percent in March 2023 from 0.76 percent in December 2022, while non-performing arrears hit 3.70 percent in March, up from 3.20 percent in December 2022.

This comes as the latest survey by Finder shows $15,000 has been added to the average annual mortgage in 14 months since last April.

In a Youtube program hosted by  Sydney’s high-profile auctioneer Tom Panos, Bouris also said that the RBA’s ongoing rate surge could lead to a wave of mortgage defaults and forced sales as more and more mortgage holders move from low fixed rates to high variable rates.

“There’s only one scenario. People are going to start to say hang on, we can’t hold on any longer, and we must sell, ” he said. “That’s what I think is a 50-50 chance of happening in the next six to nine months, after which we’ve got a problem.”

Expecting further rate hikes in July and August, Bouris was pessimistic about the economic outlook.

“My gut feeling is he might jam another one into us in August. That will be the recession we’d have for sure.”

Further Rate Hikes are Not a Solution

Meanwhile, Bouris, who is the founder of Australia’s second largest non-bank lender Wizard Home Loans—which was sold to GE Money in 2004 for $500 million—has also questioned the effectiveness of interest rate hikes in taming high inflation.

He said that a single tool doesn’t bring down the driving forces behind the price hikes and noted that energy prices and rents were key drivers in pushing inflation higher.

“How will higher interest rates bring down power prices which will go up again by 20 to 25 percent from July 1?” he queried.

“How will higher interest rates bring down rents when building approvals are in free fall and population growth is booming?

“How will higher interest rates bring down inflation when the government’s latest budget boosts discretionary spending by $40 billion over the forward estimates?”

He also pinpointed the rapid declines in labour productivity, which have left vendors “no choice but to hike their prices, in turn having impacts on inflation and GDP.”

“Something has to give, and further rate hikes are not the solution,” he urged.

Bouris’s reasoning is echoed by Nerida Conisbee, Ray White’s chief economist, who believes rate hikes have partly contributed to the growing surge in the price of rents.

Commenting on the impact of the June rate hike, Conisbee said it would continue to be a headache for the housing sector, highlighting the problem of “higher rates leading to higher inflation”.

“Investor activity is falling as a result of higher rates, meaning higher rents,” she explained.

“Developers can’t get projects out of the ground—partly because of high-interest rates but also high construction costs. Fewer homes and high population growth means higher rents.

“Rising rents mean higher inflation which means higher interest rates which means even fewer investors and fewer homes.”