Deutsche Bank predicts Reserve Bank of Australia interest rate rises in June, August and September

Australians could accept three more interest rates by September, starting with another hike tomorrow, as a hefty increase in the minimum wage could exacerbate inflation.

Deutsche Bank Australia chief economist Phil O’Donaghoe now expects the Reserve Bank to raise interest rates by 0.25 percentage point in June, August and September.

This would bring the cash rate to 4.6 percent — the highest level since November 2011 — and add another $295 to monthly payments on an average $600,000 mortgage.

This would add to the 11th rate hike since May 2022, which has already pushed cash rates to an 11-year high of 3.85 percent and marked the most severe pace of monetary tightening since 1989.

Financial markets now view a rate hike on Tuesday as a 55 percent chance, which would raise cash rates by 25 basis points to 4.1 percent.

No wonder the Melbourne Institute says Australia’s economic woes are at their worst since the 2008 global financial crisis.

Mr O’Donaghoe said Friday’s decision by the Fair Work Commission to allow an 8.6 per cent increase in the minimum wage on July 1 – the most generous since 1990 – had given him an additional rate hike in September do predict.

In light of the relative resilience of household spending, a stunning turnaround in the housing price cycle, an unemployment rate that could move sideways for at least another six months, and a minimum wage decision that poses significant upside risks to wage growthwe now expect the RBA cash rate will reach a final rate of 4.6 percent at the September meeting,” he said.

“In terms of timing, we expect the RBA to rise 25 basis points at the June meeting this week, another 25 basis points in August and another 25 basis points in September.”

If interest rates were raised three more times, a borrower with an average mortgage of $600,000 would see their monthly payments increase by another $295 to $3,928, up from $3,633 today.

Monthly payments would be $1,622 or $19,464 a year higher than at the beginning of May 2022, when the RBA cash rate was at a record low of 0.1 percent and banks offered variable mortgage rates with a “two” in front.

Mortgage rates are now above 6% and three more rate hikes would bring rates closer to 7% in September, the month in which Reserve Bank of Australia Governor Philip Lowe’s seven-year term ends.

Deutsche Bank Australia chief economist Phil O’Donaghoe now expects the Reserve Bank (Governor Philip Lowe, pictured) to raise interest rates by 0.25 percentage point in June, August and September

The Fair Work Commission’s decision to grant an 8.6 percent raise to 184,000 minimum wage workers in the hospitality, retail and tourism industries is likely to affect other workers.

Judge Adam Hatcher, the new industrial arbitrator president, also gave 2.5 million workers on national awards a 5.75 percent raise.

Mr O’Donaghoe said the increase for the low wages could push the broader wage price index to a record 4.5 per cent.

This would beat the Reserve Bank’s forecast for wages to reach a 14-year high of four percent this year, reaching levels unprecedented since Australia’s Bureau of Statistics series on wages began in 1998.

Ben Thompson, the co-founder and CEO of human resources software group Employment Hero, said the large minimum wage increase could have unintended consequences.

“With all this in mind, there is a risk in this FWC decision for both employees and employers,” he said.

“Firstly, that such a large increase could fuel a wage-price spiral and secondly that unemployment could increase.”

The Melbourne Institute think tank noted that the misery has worsened since the pandemic until this year reached its worst point since the GFC in 2008.

Report authors Guay Lim and Sam Tsiaplias said high interest rates and a crisis in the cost of living made those with jobs particularly unhappy.

“A key factor in the rising cost of living, particularly for households with working people – also known as employee households – is the impact of rising interest rates,” they said.

The Melbourne Institute think tank noted that the misery has worsened since the pandemic until this year reached the worst point since the GFC in 2008. Report authors Guay Lim and Sam Tsiaplias said high interest rates and a crisis in the cost of living have left those with a job made particularly unhappy

“Recent rate hikes have increased the cost of living for workers.”

Unemployment rose to 3.7 percent in April, up from a 48-year low of 3.5 percent, but the RBA expects it to reach 4.5 percent by December 2024.

Borrowers have endured the most rate hikes since the RBA set its target cash rate in 1990, meaning the pain is unseen since 1989, when rates hit 18 percent in an era of more affordable housing.

April’s monthly inflation reading rose from 6.3 percent to 6.8 percent, pushing the consumer price index further above the RBA target of 2 to 3 percent.

The Reserve Bank’s June decision will be announced on Tuesday afternoon.