Official data last week showed anotherdrop in full-time employment in September. The country has shed 53,200 full-time jobs since June,with the unemployment rate being held down by a drop in the participation rate.

Charity and welfare organisations have reported a jump in the number of people asking for assistance as inflation and higher mortgage repayments reduce their incomes.

Bullock said those with mortgages had experienced a “significant decline” in spare cash compared with renters or those who owned their home outright. Higher interest costs on variable-rate mortgages had reduced their cash flow more than overall inflation.

According to Bullock,about 5 per cent of all variable-rate borrowers – almost 200,000 households – are now paying more for essential expenses and their mortgages than they earn.

About 25 per cent of highly leveraged people – those with loans at least four times their income – are spending more than they earn.

“These borrowers may be finding ways to make ends meet,but this can involve some difficult financial decisions,” Bullock said.

“This could include drawing on past savings,working extra hours if they are able,or forgoing some expenditure that would in normal times be considered non-discretionary. At the extreme,it could involve negotiating a hardship program with their lender or selling their property.”

Even this could be an understatement of the number of households struggling at present.

Using a broader measure of essential expenses,which can include outgoings such as private school fees and health insurance,Bullock noted about 15 per cent of borrowers could not make ends meet at present. Among the highly leveraged,the proportion soared to 50 per cent.

Bullock said the bank wanted to ensure the public had confidence it would return inflation to its target band of 2 to 3 per cent. If those expectations shifted,and people believed inflation would be higher for longer,the Reserve would have to tighten monetary policy even further.

“The board has been clear that it has a low tolerance for allowing inflation to return to target more slowly than currently expected,” she said. “Accepting this would risk eroding public credibility in our commitment to low and stable inflation.”

Answering questions after her speech,Bullock said there were signs in the economy that the bank’s rate rises were having an effect,but there were contrasting forces:household budgets were looking solid,but spending was declining.

“On the one hand,household balance sheets are actually pretty solid,” she said. “On the other hand,real household disposable incomes have taken a hit.”

Bullock said one of the benefits of the central bank’s target range for inflation of 2-3 per cent was that it was flexible,which meant the bank could give itself time to get it back within that range.

“It means that if we think we can bring it down a bit slower,and that’s what we’re trying to do,we could,” she said.

“So the advantage of our inflation target is it is flexible and allows us time if we need it,but we still have to be mindful that we don’t want to be out of target for too long.”

Bullock said that generally Australians still expected the bank to get inflation back down,but the longer inflation remains too high increases the risk of people’s inflation expectations changing.

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