ANZ and Westpac forecast 3.85 per cent cash rate hike

ANZ and Westpac predict interest rates will rise by a whole percentage point over the next six to seven months – and the Reserve Bank predicts it will raise interest rates four times by 0.25 percent.

Those increases would cost Australian borrowers with an average mortgage of $600,000 an additional $372 a month in repayments — all on top of a record seven rate hikes and inflation hitting a new 32-year high.

It comes as the Reserve Bank raised interest rates by 0.25 percentage point on Tuesday the spot rate to a new nine-year high of 2.85 percent.

In recent forecasts, ANZ and Westpac both predict that spot interest rates will hit an 11-year high of 3.85 percent in May 2023.

Westpac chief economist Bill Evans predicts a 0.25 percentage point RBA rate hike in December, February, March and May.

Reserve bank governor Philip Lowe now expects inflation to hit a new 32-year high of 8 percent this year, compared to a previous forecast of 7.75 percent.

dr. Lowe also predicts that inflation will remain above the RBA’s 2 to 3 percent target in 2024 — which is the reason behind further rate hikes.

“At our meeting today, we discussed the damage high inflation is doing to people; it’s a plague,” Dr Lowe said at a dinner in Hobart on Tuesday night.

High inflation devalues ​​your savings. It increases inequality in our society and undermines our standard of living.

“It hurts all of us by damaging the functioning of our economy.

“For these reasons, the Reserve Bank board will ensure that this episode of high inflation is only temporary.”

If ANZ and Westpac’s predictions of a cash interest rate of 3.85 percent came true, the average borrower would have seen their repayment increase by $1,211 – or 53 percent – in a year.

Westpac last week expected an RBA cash rate of 3.85 percent by March 2023, but chief economist Bill Evans changed those predictions Tuesday afternoon — now it is predicted that the cash interest rate will reach in May next year.

“Since the board has chosen not to respond to the inflation shock by more than 25 basis points, we can only conclude that if interest rates continue to rise, the increases will be 25 basis points,” he said.

David Plank, ANZ’s head of Australian economics, also predicts a cash interest rate of 3.85 percent by May 2023, based on the idea that the RBA will stick to 0.25 percentage point increases unless higher wages fuel more inflation.

“It will be very difficult for the RBA to return to 50 basis point rate hikes unless there is clear evidence of a price-wage spiral,” he said.

The futures market expects the RBA cash rate to reach 3.85 percent in July 2023.

Gareth Aird, Commonwealth Bank’s head of Australian economy, said the full effects of this year’s rate hikes have yet to wear through, as many borrowers set their mortgage rates at 2 percent last year.

“Many more borrowers than usual have fixed-rate mortgages, which attenuate the initial impact of rate hikes,” he said.

“They are usually short-term, fixed-rate mortgages and the majority of these loans will mature in the next year.

“This in turn reduces the need to keep pushing the key rate further and further into restrictive territory in 2023.”

The Commonwealth Bank expects rate cuts in the second half of 2023 rather than a 50 basis point cut by the end of next year.

NAB, Australia’s largest corporate lender, expects an interest rate hike of 0.25 percentage point in December, February and March, bringing the spot rate to 3.6 percent.

Alan Oster, chief economist at the National Australia Bank, expects the unemployment rate to rise from a nearly 48-year low of 3.5 percent to 4.5 percent in 2024, leading to interest rate cuts.

“Slow growth, rising unemployment and easing global inflationary pressures are likely to see the RBA ease policy back into a more neutral environment in 2024, with cash interest rates expected to fall below three percent,” he said.

Inflation in the year to September rose 7.3 percent — the highest annual rate since the June quarter of 1990.

An 8 percent inflation rate in the December quarter, as the RBA predicts, would bring it to its highest level since the March quarter of 1990 when it reached 8.7 percent.

The last time Australia had an inflation rate of more than 8 percent, the Reserve Bank had an interest rate of 17 percent.

But 32 years ago, houses were much cheaper compared to incomes.

Sydney’s median home price of $194,000 in early 1990 meant that a median income of $27,794, with a 20 percent down payment, had a debt-to-income ratio of 5.6.

Recent rate hikes have seen Sydney’s average house price fall 10.6 percent to $1,257,625 this year, but an average, full-time worker with a 20 percent down payment and a $1 million mortgage would owe the bank 10.9 times over. are what they deserve.

The Australian Prudential Regulation Authority considers a debt-to-income ratio of six or more risky.

The banking regulator also requires lenders to assess a potential borrower’s ability to cope with a three percentage point increase in variable mortgage rates.

Borrowers since May, with seven consecutive monthly rate hikes, have faced increases worth 2.75 percentage points — equivalent to the level of monetary policy tightening in 1994.

Another 0.25 percentage point rate hike in December would be the worst tightening in a calendar year since the RBA began publishing a target cash rate in 1990.

Westpac and ANZ’s predictions of a cash interest rate of 3.85 percent by May 2023 would mean a rate hike of 3.75 percentage points in a year.

No bank would have 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 banks’ lending capacity is limited.