Households could face double whammy on interest rates and power bills
Get ready to crash!
The removal of household energy rebates from the beginning of this year has always been a dormant factor in the re-emergence of cost-of-living struggles in 2026. However, the possibility of interest rates increasing starting from February is increasing.
Household balance sheets could be set for a punishing clampdown.
A 0.25 per cent increase in interest rates would increase repayments on the average-sized Australian home loan by around $110 per month.
Homeowners could face 20 percent higher electricity bills next year (depending on how much electricity they use) following the end of energy bill subsidies announced in December.
Meanwhile, the prospect of interest rate hikes will certainly influence the narrative that house price increases will taper off and subside this year, thus reducing the wealth effect experienced by homeowners as house prices rise.
Higher energy costs will disproportionately impact low-income households where energy costs make up a larger share of their weekly budgets.
Economists and money market investors are considering the possibility of a rate hike in February. Until late last week, most of the money was betting that the Reserve Bank of Australia would keep interest rates steady.
But that all changed on Thursday when a surprising drop in unemployment threw a grenade into their calculations. Many economists have revised their expectations and now see next month as the time for the RBA to take a pre-emptive move against rising inflation, which has already risen above the central bank’s target range of 2 to 3 per cent.
In the view of Westpac’s chief economist, Luci Ellis, “Inflation data will once again cast the deciding vote at the RBA policy meeting in February.”
The respected economic teams of the Commonwealth Bank, UBS and HSBC are among those currently predicting a rate hike in February.
Whether the rest of the forecast package follows depends largely on inflation figures for the December quarter due to be released on Wednesday.
While the rate hike will be welcomed by depositors, mortgage-holding households will soon feel short-changed as they received just three rate cuts in the last cycle before borrowing costs started rising again.
The end of electricity rebates, which the federal and state governments introduced to provide a valve against the financial pressure society faces during times of high inflation, will worsen any financial distress.
This was a $6.8 billion aid package that was given to all households but disappeared at the end of December.
Higher energy costs will also affect inflation figures, but these will not be reflected in December’s consumer price index reading.
The end of energy bill subsidies (worth $300 a year for households), combined with the rise in rates, could dampen the strong rise in consumer spending that was evident last year, which Westpac said was broad-based across low and high income groups.
How to mitigate the impact of removing energy rebates is urgent for the government, which will feel the backlash from society when bills start hitting inboxes in the coming months.
Energy minister Chris Bowen has given energy retailers a five-month deadline to draw up a plan to offer three hours of free electricity to customers as part of a new government scheme called the Solar Sharer.
But there has been plenty of pushback from energy companies, who believe the plan is complicated and carries even higher price risks.
Even if the plan is successfully implemented in the middle of the year, consumers will face a period of uncomfortable price increases in the near term.
For those with a mortgage, this can be a double whammy for household finances.
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