ANZ and Westpac have made grim predictions of a whole percentage point hike in interest rates over the next six to seven months, with the Reserve Bank tipped to lift rates four more times.
The revised forecasts come following the latest Reserve Bank decision to raise rates by another 0.25 percentage points, taking the OCR to a new nine-year high of 2.85%.
ANZ and Westpac now both predict the cash rate to hit an 11-year high of 3.85% by May 2023, which would cost Aussie borrowers with an average $600,000 mortgage an additional $372 a month in repayments – that on top of a record seven consecutive rate hikes plus inflation hitting a new, 32-year high, Daily Mail Australia reported.
Bill Evans, Westpac chief economist, is expecting the RBA to lift the OCR by 0.25 percentage points in December, February, March, and May.
Reserve Bank Governor Philip Lowe, meanwhile, revised his previous forecast of 7.75% inflation this year, up to a new 32-year high of 8%. Lowe also now expects inflation to remain above the RBA’s 2% to 3% target into 2024, exacerbating the need for further rate hikes.
“At our meeting … we discussed the damage that high inflation does to people; it is a scourge,” Lowe said. “High inflation devalues your savings. It worsens inequality in our society and it undermines our living standards. It hurts us all by impairing the functioning of our economy. It is for these reasons that the Reserve Bank board will make sure that this episode of high inflation is only temporary.”
If ANZ’s and Westpac’s predictions of a 3.85% cash rate are realised, the average borrower would have to fork out an extra $1,211 in their monthly repayments in a year.
From last week’s forecast of a 3.85% OCR by March 2023, Westpac now expects the cash rate to reach that point by next May.
“Given that the board chose not to respond to the inflation shock with more than 25 basis points, we can only conclude that as rates continue to rise the increments will be 25 basis points,” Evans said.
David Plank, ANZ’s head of Australian economics, was also expecting a 3.85% cash rate by May 2023, based on the idea the RBA will stick with 0.25-percentage-point hikes unless higher wages fuel more inflation, Daily Mail Australia reported.
“It will be very difficult for the RBA to return to 50-basis-point rate hikes unless clear evidence of a price-wage spiral emerges,” Plank said.
The futures market is predicting the OCR will reach 3.85% by July 2023.
Gareth Aird, Commonwealth Bank head of Australian economics, said the full effects of this year’s rate rises were yet to be felt due to many borrowers having fixed their mortgage rates last year at 2%.
“Far more borrowers than usual are on fixed rate mortgages, which blunts the initial impact of rate rises,” Aird said. “They are generally on short dated fixed rate mortgages and the bulk of these loans will expire over the next year. This in turn reduces the need to continue to take the policy rate higher and deeper into restrictive territory in 2023.”
The Commonwealth Bank is watching out for rate cuts in the second half of 2023, including a 50-basis-point easing towards the end of next year.
NAB is expecting further rate hikes of 0.25 percentage points in December, February, and March, which would take the cash rate to 3.6%.
Alan Oster, NAB’s chief economist, predicts that unemployment will surge from a near 48-year low of 3.5% to 4.5% in 2024, which would result in rate cuts.
“Slow growth, rising unemployment, and easing global inflation pressures are likely to see the RBA begin to ease policy back towards a more neutral setting in 2024, with the cash rate expected to fall back below three per cent,” Oster said.
Inflation in the year to September surged by 7.3%, which was the fastest annual pace since the June quarter of 1990.
If RBA’s prediction of an 8% inflation pace in the December quarter comes true, it would be at the highest level since the March quarter of 1990, when it hit 8.7%.
The last time inflation surpassed 8%, the central bank had 17% interest rates. Houses were much cheaper compared with incomes 32 years ago, however.
In early 1990, Sydney’s median house price was $194,000. This meant a borrower with an average income of $27,794, with a 20% deposit, had a 5.6 debt-to-income ratio.
Thanks to recent rate hikes, Sydney’s mid-point house price this year plunged by 10.6% to $1,257,625 but an average, full-time worker with a 20% deposit and a $1 million mortgage would have to pay the bank 10.9 times what they earn, Daily Mail Australia reported.
According to the Australian Prudential Regulation Authority, a debt-to-income ratio of six or more is risky.
Lenders are also required by the prudential regulator to assess whether a potential borrower can cope with a three-percentage point rise in variable mortgage rates.
With seven consecutive monthly rate hikes since May, borrowers have been dealt with 2.75 percentage points worth of increases, which was equivalent to the 1994 level of monetary policy tightening.
A further 0.25-percentage-point rate rise in December would be the most severe level of tightening in a calendar year since 1990, when RBA began publishing a target cash rate.
Westpac and ANZ’s forecasts of a 3.85% cash rate by May 2023 would mean 3.75 percentage points worth of rate rises in a year.
Banks haven’t been required to assess their level of increase in May 2022, which means more financial stress than expected and a decline in house prices as the lending capacity of the banks is constrained, Daily Mail Australia reported.
