Brace for impact!
The removal of household energy rebates from the start of this year was always the sleeper for the reemergence of cost of living struggles in 2026. But now there is a growing possibility that come February, interest rates will also rise.
Household balance sheets could be set for a punishing pincer.
A 0.25 percentage point increase in rates would increase repayments of the average-sized Australian home loan by around $110 per month.
Householders could be slugged with a 20 per cent larger power bill over the year ahead (depending on how much electricity they use), after an end to energy bill subsidies, announced in December.
Meanwhile, the prospect of rate rises will certainly play into the narrative that house price gains are set to peter out this year and will – thus diminishing the wealth effect that homeowners have been experiencing as property prices rose.
Higher energy costs will disproportionately affect lower income households for whom power costs constitute a larger share of weekly budgets.
Economists and money market traders have been fence-sitting on the prospects for an interest rate hike in February. Until late last week most of the money was betting that the Reserve Bank of Australia would keep interest rates on hold.
But that all changed on Thursday when a surprising fall in unemployment threw a grenade into their calculus. Several economists have revised their expectations and now see next month as the time for the RBA to make a pre-emptive strike against rising inflation which has already crept above the central bank’s target band of 2 to 3 per cent.
As Westpac’s chief economist Luci Ellis sees it, “the inflation data will once again have the casting vote in the RBA policy meeting in February”.
Respected economic teams from the Commonwealth Bank, UBS, HSBC are among those who are now tipping a rate rise in February.
Whether the remainder of the forecasting pack follows is largely dependent on the inflation figures for the December quarter which are to be released on Wednesday.
While a rate rise would be welcomed by depositors, households with mortgages will feel short-changed that they received only three rate cuts in the latest cycle before borrowing costs started rising again.
Any financial hardship will be exacerbated by the sunsetting of the electricity rebates that the federal and state governments introduced to provide a valve for the financial pressure faced by the community during the height of inflation.
That was a $6.8 billion relief package – one given to all households but disappeared from the end of December.
The higher power costs will also feed into the inflation numbers, although they will not be reflected in the upcoming consumer price index December reading.
The end of the energy bill subsidies (worth $300 a year to households), combined with a rise in rates, could dampen the strong upswing in consumer spending that has been evident over the past year and which Westpac says has been broad-based across lower to higher income groups.
How to soften the hit from the removal of energy rebates has an urgency for the government, which will feel the backlash from the community when bills start hitting inboxes in months ahead.
Energy minister Chris Bowen gave energy retailers a five-month deadline to come up with a plan to offer customers three free hours of electricity as part of a new government scheme called Solar Sharer.
But there has been plenty of pushback from energy companies that believe the scheme is complex and carries risks of even higher prices.
Even if the scheme was successfully implemented in the middle of the year, consumers still face an uncomfortable near term period of price hikes.
For those with a mortgage, it could be a double whammy for household finances.
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