The economic juggling act for the Reserve Bank is about to get a lot harder.
The market and now three of Australia's major banks have now revised forecasts for interest rates, bringing forward predictions that a rate hike could happen as early as June.
RBA Governor Philip Lowe has flagged he is waiting to see key wages and inflation data slated for May, but the head of the country's central bank also needs to weigh up what impact multiple hikes will have on household budgets.
One elephant in the room needing attention is how a rate hike to possibly 3 per cent by 2024 would have on debt serviceability.
Monetary policy over the coming year will be focused on curbing the recent rises in inflation which have exceeded the RBA's target range of 2 to 3 per cent. But those cooling measures need to be balanced with rising risks of default.
Rising rates will place greater pressure on loans, with cost estimations based on Westpac's 2 per cent rise by June 2023, blowing out monthly mortgage repayments by more than 20 per cent. This will add to the cost of living and unfortunately the added stress will see a number of households default on payments.
However, the rising stress is likely what will lead to a long tailwind of slow rate hikes by the RBA. A number of economists believe debt serviceability will be a major factor in how steep the RBA is willing to go.
Westpac chief economist Bill Evans in his update said the debt servicing ratio would be higher than in 2009 when the last tightening cycle occurred.
In the short-term, higher inflation in combination rising rates could see any wage increases gobbled up by the ability to service higher levels of debt. This is something Labor's finance spokesperson Senator Katy Gallagher expressed concern over on Thursday.
A tightening interest rate cycle will also have a more significant impact on borrowers who have accessed lower deposit loans through government schemes.
Holding only 5 per cent equity in a home will garner more interest repayments compared to someone who bought in at 20 per cent. And if house prices slide, mortgage prison could occur for a number of people who could fall into negative equity.
The one saving grace may be the plethora of money currently held at the bank. Balance sheets are in good shape with nearly $250 billion in excess savings held in Australian bank accounts.
Those savings could be used to absorb some of the rising interest payments and RBA figureheads have previously stated Australians are great at paying back ahead of schedule. Perhaps the RBA is banking on those savings to absorb cost? But what rings true is the season of record low rates is drawing to an end.
