Major RBA interest rate call to protect struggling borrowers: 'Australian first'

The Greens have issued a major call to Treasurer Jim Chalmers ahead of the Reserve Bank of Australia's (RBA) next interest rates meeting. There are fears stubborn inflation could cause the central bank to increase rates at its August gathering, which would put significant pressure on already struggling homeowners.

But Greens senator Nick McKim has urged the government to step in and overturn that decision if it happens. The party's Treasury spokesman told The Australian there is a law available to the Albanese government to protect mortgage holders.

“The mechanics of Section 11 are that the treasurer can advise … the governor-general that is, to issue an order to the RBA board. And the RBA board has to comply with that order,” Senator McKim said.

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“Dr Chalmers … should be making it very clear to the RBA that he is prepared to use section 11 to overrule them if necessary.”

Section 11 of the Reserve Bank Act gives the Treasurer power to "override decisions made by the board of the RBA, including decisions on interest rates”.

Would you be impacted by a rate rise in 2024? Email stew.perrie@yahooinc.com

Senator McKim is concerned a rate hike in August would be the "straw that breaks the camel’s back" for many Aussies and the government can prevent a lot of pain by stepping in.

The official cash rate is currently at 4.35 per cent and has been held at that 12-year high since November last year.

What will the RBA do at its August meeting?

All eyes will be on the Australian Bureau of Statistics when it releases its quarterly inflation data later this month, which will be a big factor in the RBA's decision-making.

Fears of a rate hike grew when the ABS recently unveiled the CPI (Consumer Price Index) Indicator for May, which showed an annual increase of 4.0 per cent. That was higher than the 3.4 per cent recorded in January and February, as well as the 3.6 per cent noted in April.

Canstar’s Group Executive, Financial Services, Steve Mickenbecker, told Yahoo Finance the ABS data was "diabolical" and predicted there could even be two rate increases this year.

"Given that [the RBA is] waiting for quarterly [inflation figures], if they don't move [in August], are they really waiting until November?" Mickenbecker said.

"That's really high risk."

He added: "It’s worrying news for borrowers with an increase of 0.25 per cent adding $100 to the monthly repayment on a $600,000 loan over 30 years. Even without a rate increase, a three-month extension before a rate cut adds $288 in extra repayments to the same loan."

A rate rise would crush many Aussies

A recent Finder survey revealed how the cost of living and the sticky interest rate have been affecting homeowners across the country.

The data found one in five mortgage holders - equivalent to 693,000 people - had moved to interest-only on their mortgages over the past two years.

A further one in eight said they had extended their loan term in the last 12 months to bring down their repayments.

The research found six per cent of the 1,062 people surveyed were currently still only paying the bare minimum in a “last ditch effort” to avoid falling behind on their repayments.

Maddie Walton bought her first property in her early 20s and she's barely been able to save a cent ever since. She told Yahoo Finance there would be a "big uproar" if the RBA increased interest rates.

"I don't even have any money to spare as it is," she said. "So it would be more cutting into savings if anything."

She predicts many properties would be put up for sale if there was a rate rise, and tenants could expect to see their rents increase as well to offset landlords' more expensive mortgages.

Impact on actioning Section 11

Section 11 has never been used by any government since it was introduced.

One economist fears it would set a worrying precedent if the trigger was ever pulled as it would "spell the end of independence" for the RBA.

“The pain of the broader community, the financial stress, is originating from inflation and not from interest rates,” Judo Bank chief economic adviser Warren Hogan told The Australian.

“The reason we have independence is that there is an inherently technical nature to monetary policy and the setting of short-term interest rates needs to rise above politics.”

An independent review, which was commissioned by Treasurer Chalmers, recommended last year for the veto power in Section 11 to be repealed.

But in a dissenting report, former RBA Governor Ian Macfarlane warned that would be a "big mistake".

"It's one of those things that at first sight it doesn't appear to be very useful, but after decades of reflection I and a number of my colleagues have come to the conclusion that section 11 would be valuable in resolving a once or twice-a-century situation where there was a major irreconcilable difference between the bank and the government," he said.

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