The country’s leading banks anticipate that the cash rate will stabilize by 2023 once inflation is under control, according to predictions made by banking behemoth ANZ that borrowers will face four 50 basis point interest rate increases by November.
On Tuesday, the top four banks predicted that by Melbourne Cup Day, Australia’s Reserve Bank cash rate will more than double from its current three-year high of 1.35 percent to a 10-year high of 3.35 percent.
The RBA will raise rates by 0.5 percentage points in a row in August, September, October, and November, according to ANZ head of Australian economics David Plank, and would then maintain those rates throughout 2023 and 2024.
‘We think the RBA will take the cash rate target to a restrictive setting of above three per cent by late 2022, more than 12 months earlier than our previous forecast,’ he said.
A two percentage point increase in mortgage rates by November would see a borrower with an average $600,000 mortgage owe $708 more a month in repayments as the RBA cash rate reached the highest level since October 2012.
But Mr Plank said there was an outside chance the Reserve Bank would raise rates by 75 basis points at one of its meetings this year.
‘We do think a move of more than 50 basis points in August or September is a very real possibility, while not the central case,’ he said.
‘This could be a more of 75 basis points, or even 65 basis points if the RBA wanted to ’round’ the cash rate target to 0.25 per cent.’
Since May, Australian borrowers have copped 1.25 percentage points of RBA rate rises – with the subsequent increases in June and July marking the steepest monetary policy tightening since 1994.
ANZ is the only big four bank whose forecasts are now in line with the Australian Securities Exchange’s 30-day interbank futures market, which is predicting a 3.35 per cent cash rate but by December.
Even so, its predictions for rate hikes in 2022 are even more aggressive than what traders are expecting.
ANZ is expecting June quarter inflation data, due out on July 27, to show the consumer price index surging by 6.3 per cent – the fastest pace since 1990.
In a possible sign of things to come for Australia, New Zealand’s inflation rate in the year to June surged by 7.3 per cent, the biggest increase in 32 years.
The Commonwealth Bank, Australia’s biggest home lender, is expecting a 2.6 per cent cash rate by November, based on a 50 basis point rise in August and September followed by 25 basis point move on Melbourne Cup Day.
Westpac has released new forecasts showing the Reserve Bank cash rate will peak at a nine-year high of 2.6 per cent by February 2023 and stay at that level until at least December 2025.
Before then, home borrowers are expected to cop another 0.5 percentage point interest rate rise in August.
Westpac chief economist Bill Evans is now predicting 0.25 percentage point rate rises in September, November and February.
Last week, he forecast pauses in September and October but Westpac has now updated its forecasts to have a quarter of a percentage point increase in September, instead of December as earlier predicted.
Mr Evans predicted the tightening cycle would resume in November, after inflation for the September quarter, due out on October 26, showed an even worse number than June quarter.
ANZ is now expecting unemployment, which in June fell to a 48-year low of 3.5 per cent, could drop to 3.3 per cent this year and even below 3 per cent – leading to wage pressures feeding into inflation.
‘An unemployment rate with a 2-handle is not out of the question,’ Mr Plank said.
‘Importantly we expect wages growth to accelerate over the course of this year and 2023, despite the faster pace of rate hikes which are, remember, largely due to the tighter than expected labour market.
‘What’s more, we think wages growth will prove quite persistent even as the economy slows.’
RateCity research director Sally Tindall said borrowers would have to cut back on takeaway cappuccinos.
‘If you are struggling with the higher repayment see how you can make lifestyle changes so that you spend less every single week,’ she said.
‘That might be fewer dinners out and less takeaway coffees.’
The other major banks – Commonwealth Bank, Westpac and NAB – are forecasting a 2.6 per cent cash rate in 2022 or 2023, instead of 3.35 per cent as ANZ is predicting.
Three of the big four lenders are banking on the RBA to be more concerned about inflicting pain on borrowers with high debt levels.
According to recent CoreLogic statistics, based on median prices in capital city postcodes, 41.9% of Australia’s housing and unit markets declined in the June quarter.
Comparatively, in the March quarter, prior to the RBA rate increases but concurrent with rising fixed mortgage rates at the banks, 23.6% of markets were in decline.
The latest rate increase in July, which brought rates to a three-year high of 1.35 percent, was not included in the statistics for 3,085 capital city property markets, which covered the rate increases in May and June that raised the cash rate to 0.85 percent.
The slowdown that started in Sydney and Melbourne was now reaching Brisbane, Canberra, and Hobart, according to CoreLogic economist Kaytlin Ezzy.
‘Historically, premium suburbs are more volatile than the more affordable areas, values shoot up much faster during an upturn, but are among the first to fall during a declining market,’ she said.
Sydney was the worst affected with 81.1 per cent of house markets falling during the June quarter.
The median house price fell by three per cent during the June quarter to $1.382million but three out of four suburbs still have a mid-point house value of more than $1million with no house markets under $500,000.
Sydney unit prices fell by 2.1 per cent in the June quarter to $821,850.
Melbourne median house price fell by 2.4 per cent in the June quarter to $975,850 with 80 per cent of house markets affected, compared with 60 per cent of unit markets.
The downturn that begun in the city’s inner-east is now more widespread.
‘While units in some of those more expensive inner-city areas are starting to decline nationally, fewer unit markets fell over the quarter than houses,’ Ms Ezzy said.
During the June quarter, the median home price in Hobart decreased by 0.5% to $796,863, with a reduction seen in half of the markets.
However, during the last three months of the 2021–22 fiscal year, home prices increased in Brisbane, Adelaide, Perth, Darwin, and Canberra.
The median price of a home in Brisbane increased by 2.5% in the June quarter to $892,133, although 11.6% of its housing markets saw a quarterly decline in prices.
After the March quarter inflation report revealed the consumer price index jumping by 5.1% – the fastest annual pace in 21 years – the RBA raised the cash rate for the first time since November 2010, ending the era of the record-low 0.1 percent cash rate.
The half a percentage point increase in June was the steepest since February 2000