What the board asked for
Reserve Bank of Australia Assistant Governor Sarah Hunter told a property conference on Tuesday that inflation is a top priority right now, and that the board may well have to raise interest rates if inflation looks likely to prove stronger than expected. She went further than a warning: the bank wants consumer demand to soften so that overall demand comes back into better balance with constrained supply, and she noted that earlier increases have already slowed housing activity and pushed prices lower in most major cities. Markets assign about a 70 per cent probability to a 25 basis point rise to 4.60 per cent on 29 September.[1]
Read as a monetary operation rather than as rhetoric, that is a statement about cash flows. A higher policy rate raises the price at which banks fund themselves and, in a market where most mortgages reprice quickly, it raises the monthly servicing cost of an existing loan without waiting for any new borrowing. Income moves from indebted households to creditors, and the spending that income used to support falls away. A rival reading sits alongside it: Hunter also pointed to elevated oil prices as a channel into inflation expectations, and a fuel bill drains the same household budget with no policy rate involved at all.[1]
The survey measures beliefs
The Westpac-Melbourne Institute Consumer Sentiment Index fell 5.2 per cent in September, from 88.9 to 84.4. Underneath the headline, the mortgage rate expectations index climbed from 158.8 to 170.4, the share of consumers expecting mortgage rates to rise over the next year went from 59 per cent to 64 per cent, and among mortgage holders it stood closer to 73 per cent. Assessments of family finances against a year ago dropped from 80.0 to 72.6, and the index for whether this is a good time to buy a dwelling fell from 95.7 to 85.5.[2]
Put the two together and the same balance sheet appears on both sides. The bank names softer consumer demand as the objective and says housing has already cooled; the survey finds households marking up the repayment they expect and marking down the case for buying a home. Both descriptions converge on the mortgaged household as the account through which the adjustment runs. That convergence is also the reason to be careful with the sentiment number: an index of expectations belongs to the pricing of the policy, and the household's actual consumption belongs to a series the survey does not report.[1], [2]
Which balance sheet carries it?
The gap between the two series is where the argument about September sits. Westpac reads its own survey as a reason for the board to hold on 28 and 29 September, arguing that one monthly inflation reading from a noisy series is thin ground for a move and that the next update arrives a day after the decision. The counter-case treats the same weakness as the transmission the bank asked for. One observable test separates them without waiting for a communique: if the mortgage rate expectations index holds above 170.4 through the October survey while the family finances measure stays below 72.6, the squeeze has reached household cash flow rather than household mood alone, and a hold in September buys no relief for the borrower.[2]