Australia’s four major banks are now expecting the Reserve Bank to lift interest rates next week, putting borrowing capacity and buyer confidence back in focus as David Koch calls on the central bank to explain what is driving persistent inflation.
The prospect of another hit to property buyers has firmed ahead of the Reserve Bank’s September 28-29 meeting, with Commonwealth Bank, Westpac, NAB and ANZ all forecasting a 25-basis-point increase on September 29.
That would take the cash rate from 4.35 per cent to 4.60 per cent, following three increases already this year, and put further pressure on borrowing capacity at a time when higher rates are already influencing buyer budgets and housing market conditions.
Against that backdrop, Compare the Market Economic Director David Koch has issued an open letter to RBA Governor Michele Bullock, arguing households risk being handed the bill for inflation that has not primarily been generated by their spending.
“There’s an increasing likelihood a great many Australians are likely to be handed a bill they did not run up,” Mr Koch said.
“Before the board votes, I’d ask it to look closely at who generated that worryingly high level of growth … It wasn’t households.”
Mr Koch called on the RBA to be more transparent about the role government spending has played in keeping inflation elevated and questioned why mortgage holders should carry the burden through higher borrowing costs.
“A meaningful slice of the inflation your board is trying to contain is not being generated in a shopping centre. It is being set in a cabinet room,” he said.
“Australians have absorbed three rate rises this year, taking the cash rate to 4.35 per cent. Interest payments now consume 5.8 per cent of household gross income… higher than the 5.7 per cent peak of 1990, when mortgage rates were near 17 per cent.
“Today’s borrowers are carrying a heavier interest burden than the generation we all cite as the horror story.
“Households complied. Governments didn’t seem to. Yet only one of those two gets the higher interest rate bill.”
The comments come as expectations for another rate rise have shifted significantly among the major banks.
Commonwealth Bank now expects the RBA to lift the cash rate by 25 basis points next week, bringing forward its previous forecast for a November increase.
CBA Head of Australian Economics Belinda Allen said higher oil prices, stronger-than-expected economic data and recent RBA commentary had shifted the bank towards an earlier move.
“We now expect the RBA to hike the cash rate by 25 basis points to 4.60% at its 28-29 September meeting,” she said.
“Our previous call was for a rate hike in November once the full quarterly CPI confirmed the materialisation of upside risks to inflation.”
Another increase beyond September remains a risk for CBA, rather than its central forecast.
Westpac has also brought its expected increase forward from November to September, with Chief Economist Luci Ellis forecasting a 25-basis-point rise next week.
The bank said the change reflected stronger inflation readings, higher oil and energy prices and a shift in the RBA’s messaging.
Westpac expects the board itself may be divided over the decision.
“We continue to expect a split vote at the meeting,” Ms Ellis said.
She also said there was “a risk of a follow-up hike” if inflation remained elevated and economic data continued to surprise on the upside.
NAB has been expecting a September increase since late August, following stronger-than-expected July inflation data.
NAB Group Economics expects the RBA to increase the cash rate by 25 basis points to 4.60 per cent in September, with the risk tilted towards an additional November increase if economic activity proves resilient.
ANZ has taken the most aggressive rate view of the four majors and now expects increases in both September and November.
ANZ Economist Sophia Angala said the continuing Middle East conflict and higher oil and petrol prices were contributing to elevated inflation expectations.
“We now expect the RBA to increase the cash rate by 25bp in September, in addition to the 25bp rate hike we expect in November,” she said.
If both ANZ’s forecast increases eventuate, the cash rate would reach 4.85 per cent.
Despite the consensus among the major banks, the RBA has not signalled that a September increase is a done deal.
Speaking in Sydney on Tuesday, Ms Bullock said the central bank was assessing whether upside inflation risks were materialising, including excess demand, developments in the Middle East and inflation expectations, but explicitly rejected suggestions she was giving forward guidance on next week’s decision.
“I’m not signalling anything. I’m only one person on the Board, so I can’t tell you what the board will want to do,” she said.
The RBA Governor also directly addressed the housing market and the transmission of higher rates into property activity, saying the central bank does not target house prices but closely monitors the sector.
“Interest rate rises do have an impact on the housing market,” she said.
For real estate businesses, another increase would therefore add to an already challenging financing environment, with agents likely to be watching its impact on borrowing capacity, buyer participation and transaction activity.
Mr Koch said mortgage holders should prepare for the possibility of higher repayments now.
Compare the Market estimates a 0.25 percentage point increase could add approximately $93 a month to repayments on a $600,000 home loan.
He said borrowers should review their home loans, negotiate with their lenders, compare competing offers, build a financial buffer and review household expenses ahead of the RBA decision.
But he said Australians deserved greater clarity about why another increase was required and what was driving the inflation the RBA was attempting to contain.
“Households complied. Governments seemingly have not. Yet only one of those two gets the higher interest rate bill.”
“If the board must move on 29 September, please do Australians the courtesy of naming who forced your hand.”