Australian borrowers are facing four more massive rate hikes over the next four months that will bring the official cash rate above 3 per cent before Christmas, ANZ warns.
The bank drastically revised its forecasts on Tuesday, saying that “a strong boost in the labor market and clear upside risks to inflation” would force the Reserve Bank to move to a “restrictive environment” by the end of 2022, “more than 12 months before ours.” previous forecast ”.
“Our expectation is that the RBA will do this through four successive 50 basis point rate hikes in August, September, October and November,” wrote ANZ’s Australian head of economy, David Plank. “That 200 basis points of additional tightening makes the cash rate target 3.35 percent in November.”
This “would advance the point at which the economy is slowing below the trend” and “also suggests that house prices will fall more than 15 percent more or less than we currently forecast by the end of 2023.”
“But it doesn’t necessarily mean a hard landing for the economy,” he added.
“A cash rate of 3.35 percent implies that household interest payments as a percentage of household income reach below the level reached in 2008.”
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Christopher Joye of Coolabah Capital has argued that the RBA’s first rate hike in May “broke the Australian real estate market”.
“There is a striking structural change in the pace of falling house prices that coincides almost exactly with the RBA’s cash rate hike by 25 basis points in May,” the head of week.
“After super solid employment data during the week, the RBA is now almost certain to raise rates by 50 basis points for an unprecedented third consecutive month in August. This would mean that mortgage costs in variable rate will have increased by 175 seemingly incomprehensible base points (or 1.75 percentage points) in just three months (or more than four RBA meetings).
Impressive employment data released last week showed that unemployment fell to a 50-year low of 3.5% in June, the lowest since August 1974, raising the outlook for employment. faster and more aggressive rate increases.
“We don’t think the RBA is comfortable with the policy of just reaching neutral by the end of the year, given that context,” Mr.
The RBA has already given consecutive increases of 50 basis points in June and July, after an increase of 25 basis points in May, the first since 2010.
“There is a significant possibility that the RBA may choose to move more than 50 basis points at one or more of its upcoming meetings (75 basis points, for example, or even 65 basis points to‘ round out ’the goal of cash rate to 0.25 nearest). percent), “Mr Plank said.
“We would sell this as an advance rather than implying a higher terminal rate. At this stage, our thinking is that the cash rate will have to be kept in this restrictive environment for an extended period of time, given the persistence of the basic inflationary pressures. But we are aware that downside risks to the economic outlook will increase at such a rapid pace towards a restrictive environment. “
Consumer prices rose 5.1% in the March quarter, the fastest pace in two decades.
Inflation figures for the June quarter, which will be released next Wednesday, July 27, are expected to show another sharp rise.
ANZ’s call is significantly higher than that of its peers, who are already warning about severe pain on the horizon for homes.
Last week, CommBank revised its own forecast to two increases of 50 basis points in August and September, followed by an increase of more than 25 basis points in November, which would bring the cash rate to 2.6 per cent.
“This would represent an incredible rate of hardening, especially considering that the starting point was a cash rate of only 0.10 per cent and household debt stands at a record level as a proportion of income. (Australia has one of the most indebted family sectors in the world.) “, Wrote CommBank ‘s Australian Chief Financial Officer, Gareth Aird.
“The impact on households with a mortgage will be very significant as the percentage change in the mortgage rate will be incredibly large.”
Aird noted that most borrowers had variable loans and would see their repayments “go up very quickly”.
Those with fixed loans “would be isolated, at least initially,” but faced massive pain next year.
“Fixed rate borrowers will pay an average fixed rate mortgage of 2.25% at a rate of around 4.5-5% in 2023 according to our cash rate forecast profile” , he wrote.
“This will result in a very significant change in the cost of debt interest (for context, mathematically moving from a mortgage rate of 8% to 16% is the same as 2.25% to 4.5% as to what happens) .to the cost of interest on the debt: it doubles).
Westpac also sees the cash rate reach 2.6 percent early next year.
The bank expects an increase of 50 basis points in August, followed by 25 basis points in September.
“The rate hike we had previously expected in December has shifted to September,” Westpac chief economic officer Bill Evans wrote.
“This is consistent with our view that in December the evidence will be compelling that the Australian economy is slowing under the weight of a cash rate of 2.35 per cent (after the projected move of 25 basis points in November), which is firmly in contractionary territory.
NAB, meanwhile, expects the cash rate to reach 2.6 percent, up 50 basis points in August followed by 25 basis points each in September, November and February.
“We have further loaded our rate track and now we see that the cash rate target is 2.35 per cent in November (it was 2.1 per cent) and reaches 2.6 per cent in the February (previously in mid-2023), ”NAB economists wrote last year. week.
Rising interest rates have already caused the “strongest slowdown in more than 30 years,” according to the June PropTrack report, which showed domestic house prices fell 0.25 percent a month past.
This was led by continuous falls in Sydney, 0.4%, and Melbourne, 0.61%.
Nationally, prices have continued to rise 34 percent since March 2020.
“While prices have only dropped 0.55 per cent from the March 2022 high, a disproportionate rise in rates in early June and expectations of much higher rates at the end of the year continue to dampen all markets, with widespread declines observed in June, ”the report said. .
Last week, real estate auctioneer and coach Tom Panos urged the RBA to consider the impact of its rate hikes on the market, saying it was “very stressed” after “almost no buyers” showed up at the their auctions.
“People have turned around and thought, man, this is getting really scary as a buyer; I think there’s definitely a part of that,” he said in a video.
“So here’s the deal. If the Reserve Bank wanted evidence, because they keep saying in their comment, we’re looking at what our policies for raising property interest rates are doing, if they really want to look “Take it from someone who is on the front line, take it from someone who is watching it right there in the heat of the moment, it has already had an impact.”
frank.chung@news.com.au