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Big bank tips extra mortgage pain for Christmas

A major Australian bank expects four more hefty interest rate hikes from August and predicts the current cash rate of 1.35 per cent will more than double to exceed three per cent by December.

Jul 19, 2022, updated Jul 19, 2022
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ANZ is now predicting that interest rates will rise above three per cent this year, more than 12 months earlier than previously forecast.

The bank is predicting four successive 50 basis point rate hikes in August, September, October and November – a full 200 basis points of tightening that’ll see the cash rate hit 3.35 per cent by November.

The Reserve Bank of Australia might also opt to hike rates by more than 50 basis points at one of those meetings, although that wouldn’t imply a higher terminal rate, ANZ head of Australian economics David Plank wrote.

“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,” he forecast.

ANZ’s prediction is based on the strong momentum in the labour market, with last week’s monthly jobs report considered the best in nearly five decades.

ANZ’s forecast is most hawkish forecast of the big four banks, with the others predicting rates to peak at 2.6 per cent by early next year.

But the interest rate markets agree with ANZ, predicting a 3.3 per cent rate hike by the end of 2022.

They also give a 79 per cent chance that rates will rise to 2.0 per cent at the next RBA meeting, which would require a 65 basis point hike.

Minutes from the Reserve Bank’s last meeting on July 6 indicated board members said the cash rate needed to rise, but don’t have a good idea how much it will take to stop stimulating the economy.

The board discussed a “neutral real interest rate for Australia”, a policy rate that’s neither expansionary nor contractionary, but “members noted that gauging the level of the neutral rate is challenging in practice”.

There are different methods for estimating the neutral rate and the range of estimates is wide, board members said, according to the minutes released on Tuesday.

Still it’s clear the cash rate, currently 1.35 per cent after a 50 basis-point hike on July 6, is “well below the lower range of estimates for the nominal neutral rate.

“This suggests that further increases in interest rates will be needed to return inflation to the target over time,” the minutes say.

Reserve Bank deputy governor Michele Bullock said most households had large buffers and equity in their homes, preparing for rate increases through low fixed-rate loans and savings, in an address to the Economic Society of Australia in Brisbane on Tuesday.

The economy has been resilient but with domestic price pressures building the central bank said further hikes to the cash rate in coming months were necessary.

“Just how high and how fast the cash rate is raised will depend on many factors, but in making this assessment one of the areas the board will be closely observing is how households respond to the combination of rising interest rates and prices,” she said.

On balance households were showing considerable resilience to rising interest, with savings of $260 billion since the onset of the pandemic sitting in redraw facilities or offset and deposit accounts, coupled with strong housing price growth.

“The small decline in housing prices in recent months has only marginally eroded some of the large increases seen over past years,” Bullock said.

“Even a fall of 20 per cent in housing prices would only increase the share of balances in negative equity to 2.5 per cent.

“This low incidence of negative equity reduces the likelihood that borrowers will enter into default, as well as the size of losses incurred by lenders if they did.”

Recent borrowers were more vulnerable to rate increases having less time to accumulate equity and liquidity buffers, Bullock said.

Government policies to improve housing market accessibility for first home buyers during the pandemic also means that they are more highly represented as recent borrowers.

“Historically, FHBs have tended to have persistently higher Loan to Value Ratios and lower liquidity buffers than other borrowers, making them more vulnerable to a given house price or cash flow shock,” Bullock said.

“If the borrower were to experience a fall in income or an increase in expenses, they might find it more difficult to service the loan.

“And in an environment of increasing interest rates, there is a risk that households with high debt-to-income ratios will find it more difficult to service their debt.”

Bullock said having a job was the best way to meet loan repayments.

The last rates decision came ahead of record low unemployment figures of 3.5 per cent for June.

The Reserve Bank had previously tipped unemployment rate would not reach these lows until June 2023.

Unemployment is expected to put pressure on it to further hike interest rates when it decides next on August 2.

-with AAP

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