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ANZ fears interest rates could go even higher than they expect as wage growth has accelerated.
The bank expects the Reserve Bank of Australia to continue raising interest rates until cash rates, now at a nine-year high of 2.85 percent, reach a new 11-year high of 3.85 percent by May 2023.
But ANZ’s head of Australia’s economy, David Plank, fears the RBA could raise interest rates even further, with wage growth now above three per cent for the first time since 2013.
“We are increasingly wondering whether 3.85 percent will turn out to be the peak of the RBA cycle, or whether it will be higher,” he said.
“An important factor is what happens to wage growth.”
ANZ fears interest rates could go even higher than they expect as wage growth has accelerated (pictured is a bartender from Sydney)
The wage price index in the year to September grew 3.1 per cent, but retail workers fared even better with a 4.2 per cent increase as Australia’s lowest paid workers benefited from a 5.2 per cent increase in the minimum wage on July 1 .
Plank said the strongest wage growth in nearly a decade would mean the Reserve Bank would raise interest rates by another 0.25 percentage point in December to a new 10-year high of 3.1 percent.
He said it is possible that next year wage growth could hit 4 percent for the first time since March 2009, when the mining boom coincided with the global financial crisis.
“We have long seen annual wage growth reach nearly four percent over the course of 2023,” he said.
“The question is whether it will continue.”
The wage price index grew by one percent in the three months to September, and Mr. Plank said another quarterly increase of that magnitude in the December quarter, and by 2023 the Reserve Bank would raise cash interest rates to more than four percent for the foreseeable future. the first since May 2012.
“If private sector wage growth returns above 1 percent quarter-on-quarter, the inflation outlook will look more challenging for the RBA,” he said.
The bank expects the Reserve Bank of Australia to continue raising rates until cash rates, now at a nine-year high of 2.85 percent, reach a new 11-year high of 3.85 percent. But ANZ’s head of Australia’s economy, David Plank, fears the RBA could raise rates even further
‘Then a cash rate of more than four percent by mid-2023 becomes more likely, with negative consequences for economic growth and house prices, among other things.’
Despite the strong profits, most Australian workers are taking a real pay cut as wage increases fall far short of the 32-year high inflation of 7.3 percent.
Inflation is more than double the Reserve Bank’s target of two to three percent, and the RBA expects the consumer price index to remain above its comfort zone through 2025.
The futures market is less concerned about interest rates than ANZ, forecasting a spot rate of 3.75 percent by September 2023.
Westpac, like ANZ, forecasts a spot rate of 3.85 percent by May 2023, while NAB forecasts a spot rate of 3.6 percent by March.
If their prediction comes true, a borrower with an average mortgage of $600,000 would see their monthly payments increase by another $372 to $3,517 from $3,145.
That’s based on a typical variable rate rising from 4.79 percent to 5.79 percent to reflect the RBA cash rate rising from 2.85 percent to 3.85 percent.
The Commonwealth Bank, Australia’s largest mortgage lender, expects a cash interest rate of 3.1 percent by December 2022.
The futures market is less concerned about interest rates than ANZ, forecasting a spot rate of 3.75 percent by September 2023.
But Gareth Aird, the CBA’s head of Australian economics, said the 48-year low unemployment rate of 3.4 percent in October could push the Reserve Bank’s rate of increase even higher.
“At the margin, it provides support for a further 25 basis point rate hike at next February’s board meeting,” he said.
Borrowers have endured seven straight monthly rate hikes since May, marking the RBA’s most aggressive monetary policy tightening since 1994.
This has resulted in someone with a $600,000 mortgage going through their $839 repayments from $2,306.
Just over six months ago, the RBA money rate was at a record low of 0.1 percent and the Commonwealth Bank offered 2.29 percent variable mortgage rates.