The orthodox response by central banks to the rise in inflation that has been experienced since the COVID pandemic has been to sharply increase interest rates – to reduce consumer spending, increase unemployment, and (they hope) slow down price increases.

Australian households are especially vulnerable to rising interest rates, for two distinct reasons.

First, Aussie consumers are more in hock than almost any other industrial country. According to the Bank for International Settlements, total consumer debt in Australia as of the September quarter of 2022 equaled 117% of GDP. That’s second only to Switzerland among all OECD countries.

Second, the structure of Australian debt (especially mortgages) is very sensitive to changes in interest rates. The vast majority of mortgages issued in Australia (84% of new mortgages in 2022) are variable rate mortgages, for which changes in interest rates flow through very quickly into either increased monthly payments or else longer amortization times. Australia ranked third among all OECD countries in 2022 (behind Finland and Norway) in reliance on variable-rate mortgages.

So it’s no surprise, then, that Australian households are experiencing an unprecedented shock in the burden of interest costs.

From the March quarter (when the RBA began hiking rates) to the September quarter (latest data available), interest payments by households surged by 47%. That’s by far the biggest 6-month jump in interest costs in Australian history, equivalent to a $26 billion increase in annual debt service charges. It is well above the 31% rise that occurred in 1989 which led to the deep recession of the early 1990s.

Higher interest costs have already reduced the disposable spending power of Australian households by over 1% of GDP – and that’s just the tip of the iceberg. Interest rates rose further in the last quarter of 2022 (and likely will rise further still in 2023). Even those previous rate hikes have not yet fully filtered through into renewed mortgages and other debts.

It’s safe to expect consumer spending to shrink in the coming months as a result of this interest shock. And since consumer spending makes up over half of the Australian GDP, that alone could cause a recession next year. Falling construction activity and business investment (also sensitive to interest rates) will make matters worse.

Buckle up for a wild economic ride in 2023 – as a result of the RBA’s insistence to ‘solve’ global, pandemic-induced inflation by punishing its victims: Australian workers and consumers, who didn’t cause this inflation, but are now being told to pay for it.