Australia’s biggest home lender fears borrowers in August could face the biggest monthly rise in interest rates in almost three decades if there is an inflation surprise next week.
The Commonwealth Bank, along with the other big four lenders, expect the Reserve Bank of Australia to raise the cash rate next month by 50 basis points, or 0.5 percentage points, to a six-year high from 1.85%
But CBA’s Australian chief economist Gareth Aird said there was an outside chance of a 75 basis point hike on August 2, taking the cash rate to a seven-year high of 2, 1% from the current three-year level of 1.35%.
This would also be the steepest monthly increase since December 1994, meaning a borrower with an average mortgage of $600,000 would see another $256 increase in their monthly mortgage payments, plus the $352 increase it has suffered since May.
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Australia’s biggest home lender fears borrowers in August could face the biggest monthly rise in interest rates in almost three decades if there is an inflation surprise next week (in photo is a Sydney bank branch)
Mr Aird said a “material upside surprise” in the June quarter inflation data, which will be released on July 27, “would increase the risk of a 75 basis point increase at the meeting of the August meeting”.
The Commonwealth Bank expects headline inflation in the year to June to have risen 6.2%, the fastest pace since 1990.
But a bigger rise than banks and financial markets expect could lead to a bigger hike in official rates.
“Right now, market prices are somewhere between the 50 basis point increase we expect and a 75 basis point increase for the board meeting in August, where some market participants are expressing their views,” he said. said Aird.
The 30-day interbank futures market is forecasting a rate hike of 50 basis points in August.
Russia’s invasion of Ukraine has pushed petrol prices above $2 a litre, while recent flooding on Australia’s east coast has made vegetables more expensive.
“Input costs have risen in part because of supply bottlenecks and the war in Ukraine,” Aird said.
But CBA’s Australian chief economist Gareth Aird said there was an outside chance of a 75 basis point hike on August 2, taking the cash rate to a seven-year high of 2.1 percent from the current three-year level of 1.35 percent.
“And flooding on Australia’s east coast has disrupted fruit and vegetable production, putting significant upward pressure on both wholesale and retail food prices.”
Unemployment benefits and the pension will be indexed on September 20 to reflect the increase in inflation for the March and June quarters.
Headline inflation in the year to March rose 5.1%, the steepest rise since 2001, with the Australian Bureau of Statistics releasing the data on 27 April.
Less than a week later, on May 3, the Reserve Bank in May raised interest rates for the first time since November 2010, ending the era of the 0.1% cash rate , historical low, with an increase of 25 basis points.
The RBA followed that up in June with a rate hike of 50 basis points, the biggest monthly hike since February 2000.
Borrowers in July clawed back another increase of half a percentage point, taking the cash rate to a three-year high of 1.35 percent.
Commonwealth Bank Inflation Forecasts
HEADLINE INFLATION: A 6.2% rise in the year to June, which would be the steepest pace since 1990
The consumer price index is expected to have increased by 1.9 percent in three months
Core inflation: An increase of 4.6% in the year to June, which would be well above the Reserve Bank’s target of 2-3%, even with volatile items such as petrol prices and the vegetables removed.
A 1.3% increase was tipped for the June quarter
The 125 basis point increase since May has marked the strongest pace of monetary policy tightening since 1994.
ANZ’s Australian chief economist David Plank is also forecasting a 50bp rise next month, but like CBA, he is concerned about a possible 75bp rise in August.
“We think a move of more than 50 basis points in August or September is a very real possibility, although not the central case,” he said.
“This could be more than 75 basis points, or even 65 basis points if the RBA wanted to ’round up’ the cash rate target to 0.25 per cent.”
Deutsche Bank Australia chief economist Phil O’Donaghoe is forecasting a 75 basis point increase in August with an outside chance of a 100 basis point increase.
The Commonwealth Bank expects the RBA cash rate to reach 2.6% in late 2022 or early 2023 if rates in August rise by 50 basis points.
This is in line with Reserve Bank of Australia Governor Philip Lowe hinting at a peak of 2.5% during this tightening cycle.
“We have more interest rate hikes to come,” he told the Australian Strategic Business Forum this week.
The Commonwealth Bank expects headline inflation in the year to June to have risen 6.2%, the fastest pace since 1990. But a bigger rise than banks and financial markets expect could lead to a rise in larger official type (photo is a Melbourne auction)
“Two and a half percent is our rough estimate of the neutral rate.”
But ANZ is forecasting a rate hike of 50 basis points in August, September, October and November which would take the cash rate to a 10-year high of 3.35 per cent.
Should the RBA cash rate rise by 75 basis points in August, a borrower with an average mortgage of $600,000 would see their monthly payments rise by $256, from $2,658 to $2,914.
This is based on the Commonwealth Bank increasing its popular variable lending rate from 3.39% to 4.14%.
A 0.75 percentage point rate increase in August would also mean that $600,000 borrower from May would have seen a $608 increase in their monthly payments as their variable rate shot up from 2.29 percent just three months ago.
Even before this next likely rate hike in August, the average borrower has already seen their monthly payments increase by $352.
What would a rate increase of 0.75 percentage points in August mean to you
$500,000: up $231 from $2,215 to $2,428
$600,000: up $256 from $2,658 to $2,914
$700,000: Up $298 from $3,101 to $3,399
$800,000: up $341 from $3,544 to $3,885
$900,000: up $383 from $3,987 to $4,370
$1,000,000: up $426 from $4,430 to $4,856
Increases based on the Reserve Bank of Australia raising the cash rate in August by 0.75 percentage points from 1.35% to 2.1%, passing a floating Commonwealth Bank rate from 3.39% to 4.14%