Mortgage holders face brutal rate hike warning as inflation surges

Frustrated mortgage holders could be smashed with three interest rate hikes by May, as the “failed experiment on monetary policy” and huge government spending weighs on the Australian economy.

With both headline and underlying inflation accelerating over the past six months, experts say rates need to rise as soon as February.

EQ economics managing director Warren Hogan told Sky New, the Reserve Bank of Australia needed to fix a mistake from the past and reverse the three interest rate cuts from last year.

“Inflation is the devil when it comes to the operation of an economy. The longer we leave it the worse the economic downturn we will have to experience,” Mr Hogan said.

He said Australia missed its opportunity in 2024 to get rid of inflation and if we miss again in 2026 it could mean prolonged pain for households.

“Here in Australia we didn’t raise rates as much as everyone else in the world. We were doing an experiment to see if we could get rid of the inflation without a recession or rising unemployment,” Mr Hogan said.

“We have confirmation that the experiment did not work because it did not achieve its primary task of getting inflation back to 2.5 per cent.”

Mr Hogan also took aim at government spending, which he said also needed to fall to slow inflation.

“The governments of Australia need to tighten up fiscal policy, just a little bit, they just need to stop spending growing.” he said.

“They don’t need to cut wilfully and widely, they just need to be restrained and maybe that will get the job done.

“But if the governments of Australia do nothing, I think the RBA has to take the cash rate above where it was a year ago and above 5 per cent.

“They’ll have to do that if the governments don’t act.”

Federal Treasurer Jim Chalmers recently pointed to more than $114bn in savings, including $20bn in the most recent budget update.

“We have delivered the surpluses, spending restraint and savings that our predecessors could not,” he said.

Finder figures shows that if the RBA lifted rates three times in 2026, Australians with a $500,000 mortgage would be paying $240 more a month or an extra $2877 a year.

Those paying back a $1m loan would need to find $480 a month or $5754 a year.

Mr Hogan said Australia simply got its policy settings wrong.

“What I mean by that is our broad monetary policy, (including) where interest rates are and both what federal and state governments are doing with their budgets,” he said.

The Australian Bureau of Statistics on Wednesday revealed the headline inflation rate was 3.8 per cent for the 12 months until December, up from 3.4 per cent in the 12 months until November.

At the time the jobs market was stronger than expected, with the unemployment rate in December falling from 4.3 to 4.1 per cent.

HSBC chief economist Paul Bloxham agreed with the need to lift interest rates.

“Inflation surge is not because growth has been particularly strong,” he said.

“Instead, it largely reflects that the supply side of the economy (the potential growth rate) is lower than it used to be.”

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Mr Hogan said the RBA had to take this seriously for the wellbeing of the Australian people.

“They don’t need to raise rates by 75 basis points on Tuesday, they need to raise rates, send a signal (to the market) and have an agreement among themselves that unless something really bad happens in the economy or overseas, we are going to take the cash rate to 4.35 per cent,” he said.

Mr Hogan also pointed out that the next federal election was not for two years, buying the government time to make the hard financial decisions.

“You give yourself the best chance to get the hard medicine out of the way early and then make the case to the Australian people in two years that the worst is behind us,” he said.

“The Treasurer has to do it within his context and he could tilt it by saying we need to show some constraint to get inflation done.”