From ‘Squeeze’ To ‘Crush’ – Households’ Finances And Rising Interest Rates

Households’ finances are being squeezed. As discussed in Westpac’s latest Economic Bulletin “From squeeze to crush” those pressures are coming on several big fronts. High levels of inflation are eroding our spending power. Borrowing costs are pushing higher. And many families have seen the value of their assets tumbling over the past year.

“For many families, the pressure on their finances is going to become much more intense over the year ahead,” said Westpac Senior Economist Satish Ranchhod. “Close to half of all fixed-term mortgages will come up for repricing over the next 12 months, and those borrowers will face refixing at substantially higher interest rates. The resulting increase in interest payments will take a large bite out of many households’ disposable incomes.”

“The Reserve Bank has been hiking interest rates at a rapid pace to cool demand and dampen the red-hot inflation pressures that are gripping the economy,” commented Mr Ranchhod. “However, as the full brunt of those interest rate increases ripples through the economy, we expect the nation will slip into a recession in late 2023 / early 2024. That will see unemployment rising from 3.3% currently to around 4.8% over the coming years.”

“The impact of tighter financial conditions will be felt right across the economy. However, there will be some big differences across household groups,” noted Mr Ranchhod. “Notably, those who purchased their first home in the past couple of years could see their finances being squeezed especially hard.”

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