RBA boss Dr Phil Lowe now has two really important tests to pass. Recent data on how much we’re borrowing since he started hitting us with higher interest rates says he’s at least doing well with one of these tasks.

This particular task is to bring down inflation by scaring us into paying less for properties and other things. This is not only showing up with falls in house prices but we’ve now been told by the Reserve Bank’s Jonathan Kearns, that we’re borrowing 20% less to buy our beloved bricks and mortar!

This is a good sign that the Bank’s raising of the cash rate is at least hitting borrowers since May, when the official interest rates and then lenders rates started going up.

The actions are yet to really affect others not in worrying mortgage situations, as retail and business confidence numbers have been pretty strong lateley.

Dr Phil’s other test is to avoid sending us into recession. While the results of this won’t show up until next year, let me remind you that the RBA Governor can’t afford to be remembered as the guy who predicted no rate rises until 2024, then raised them so hard from 2022 that he created a recession.

Right now some economists are expecting a lot more pain than I suspect the economy can take, with the SMH today quoting rates strategist at TD Securities, Prashant Newnaha, who has bad news that I hope he’s wrong about. “We now expect the RBA to hike 50 basis points at its October meeting and retain 25 basis point hikes for the November, December and February 2023 meetings, taking our terminal cash forecast from 3.35 per cent to 3.60 per cent,” he said. (SMH)

Other economists think the RBA stops at 2.6% or 2.85% by year’s end, but one thing’s for certain: Dr Phil really needs to be careful because interest rate rises work on the economy with a lag that can be one or two years! This means the short-term effect could be weak but, once households notice how much money they’re forking out each month on their home loan repayments, they’ll go on a spending strike. This will kill inflation and could force us into recession.

The fact new borrowers are asking for less money to buy properties says house prices are really going to fall. This week the investment house Barrenjoey predicted a 25% fall in Sydney house prices. This doesn’t mean they’ll be right, but it's the kind of fall that economic models are tipping, given how quickly the RBA is raising interest rates.

Economist Anthony Doyle (now with fund manager Firetrail) explained how quickly interest rate policy works in Australia because most of us are on variable interest rate home loans, while in the US most are on 30-year fixed rate loans!

Jonathan Kearns says if someone borrowed and bought a place in April, their repayments are up 25%, after a 2.25% hiking of the cash rate. That has to hurt, but if you aren’t renting and own your home, then these higher rates aren’t hitting you.

That said, only a third of households have home loans. One third of households rent and rising interest rates and historically low vacancy rates are pushing up rents. So both groups are likely to reduce their spending to meet higher shelter costs. That’s what the RBA has to be careful about when raising interest rates.

I can see the RBA going for one more 0.5% rise next month, but then it should ‘hold fire’ to see how their previous rate hiking is working. Remember, it can take one to two years before rate rises fully work to slow an economy down and a 25% rise in home loan repayments within five months is aggressive with a capital A.

Let me remind Dr Phil that he really needs an A on his rate rising test — anything less won’t be good for his reputation.