One of Australia’s biggest banks has dramatically revised its interest rate forecast, predicting the Reserve Bank of Australia will lift the cash rate above 3 per cent this year.
ANZ Head of Australian Economics David Plank, said in the latest economic insight elevated inflation levels and labour market momentum meant higher rates were needed earlier than expected.
“We think the RBA will take the cash rate target to a restrictive setting of above 3 per cent by late 2022, more than 12 months earlier than our previous forecast,” he said.
“Our expectation is that the RBA will deliver this via four more successive 50 basis point rate hikes in August, September, October and November.
“This 200 basis points of additional tightening sees the cash rate target at 3.35 per cent by November.”
Mr Plank said the June labour market data was a lot higher than expected, with high employment growth and an unemployment rate that dropped to 3.5 per cent – the lowest rate since 1974.
“What’s more, job ads and vacancies are at extremely high levels,” he said.
“There were almost 500,000 vacancies in May, which is a record high rate of 3.4 per cent as a share of the labour force.”
Mr Plank said there was a “significant chance” the RBA could move the cash rate by more than 50 basis points at one or more of its upcoming meetings.
“We would view this as a bring forward rather than implying a higher terminal rate,” he said.
“At this stage our thinking is that the cash rate will need to remain at this restrictive setting for an extended period, given persistence in core inflationary pressures.
“But we are conscious the downside risks to the economic outlook will increase with such a rapid move to a restrictive setting.”
The bank said a faster move to a restrictive setting would mean the economy slowed below trend sooner.
“It also suggests house prices will fall by more than the 15 per cent or so we currently anticipate to the end of 2023,” Mr Plank said.
“But it doesn’t necessarily mean a hard landing for the economy. A cash rate of 3.35 per cent implies that household interest payments as a percentage of household income peak below the level reached in 2008.”
RateCity.com.au analysis showed if the cash rate hit 3.35 per cent by November, someone with a $500,000 mortgage in May, before the hikes began, could see their monthly repayments rise $909 in the space of seven months.
For someone with a $1 million mortgage, monthly repayments could rise $1818.
RateCity.com.au Research Director, Sally Tindall, said borrowers needed to “brace for significantly more rate pain”.
“ANZ now believes the cash rate could hit 3.35 per cent by November – that would be a rise of 3.25 percentage points in the space of seven months,” she said.
“With central banks hiking official rates around the world, it’s difficult to see the RBA doing anything less than a double hike in August.
“Borrowers knew rate hikes were coming but the size and pace of them has shocked households.
“Many families are already under the pump with skyrocketing grocery and petrol costs. Hefty increases to mortgage repayments, on top of this, could tip some into the red.
“If you don’t think you’ll be able to make the monthly mortgage repayments in the coming months, take action now,” she said.
