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Interest pain coming soon

PEOPLE will soon start feeling the pain of the high interest rates of the late 1980s, early 1990s.

Indeed, some would say they are feeling pain now though their gross interest rate bill will probably not be as high.

In the late 80s interest rates reached 18 per cent. The official cash rate is 6.25 per cent and a further 0.25 per cent hike is tipped next month.

However, much has changed since the fallout of the 80s and the recession “we had to have”.

Chamber of Commerce and Industry senior economist Dan Engles believes it is more appropriate to compare the interest rate hikes from 1993 to 1994.

Back then the cash rate fell to 4.75 per cent in 1993. It rose to 7.5 per cent by 1994’s end.

However, then Reserve Bank of Australia governor Bernie Fraser was slamming the monetary policy brakes harder to dodge the spectre of inflation.

Mr Fraser raised interest rates a full 1 per cent on two occasions. The highest rate rise in the latest escalation has been 0.5 per cent.

BankWest chief economist Alan Langford said mid-90s thinking was still clouded by inflationary fallout from the late 80s.

“Back then people thought inflation was low only because of the recession,” Mr Langford said.

Mr Engles said the level of personal debt was much higher now.

“People will start to feel the interest rate pinch long before we reach 7.5 per cent,” Mr Engles said.

According to the RBA’s May Semi-Annual Statement of Monetary Policy, the household debt ratio is at almost the same level as the percentage of household disposable income. Not that many years ago the ratio was about 40 per cent.

Mr Langford said the higher levels of debt should make monetary policy more potent.

“If people have considerable equity in their home loan, they can probably keep repayments at about the same level,” he said.

“However, it’s been so long since we’ve had high interest rates.”

Mr Langford said the business debt ratio was better than it had been in the 80s.

“Business balance sheets are a lot better off than they were then,” he said.

“The equity markets are still buoyant. That could change overnight though. If the equity markets go down it will mean big debt problems for businesses.”

Mr Langford said while the wealth many households had accumulated from shares was helping to moderate monetary policy there was no telling when that could change.

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