Westpac now expects the Reserve Bank to start raising official rates in August, half a year earlier than previously thought.
the main points:
- Westpac expects the price increase to start in August this year and end in early 2024
- The cash ratio is expected to rise from 0.1 percent to a peak of 1.75 percent
- If commercial banks follow these moves, someone with a $500,000 mortgage will see their payments rise by $427 per month by March 2024.
The bank’s economics team — led by respected veteran chief economist Bill Evans — is posting a modest 0.15 percentage point increase in the monetary exchange rate in August, followed by another 0.25 percentage point increase in October.
Financial comparison site RateCity said these two steps will add $103 per month to the interest payments on a typical $500,000 mortgage.
Westpac is anticipating the earlier move because it believes the RBA has been too conservative in its expectations on unemployment, wages and inflation.
By the August meeting, Westpac expects the Reserve Bank’s preferred measures of consumer prices to have met, or exceeded, the midpoint of the 2-3 percent target range for three consecutive quarters.
The next reading of inflation – Consumer Price Index for the December quarter – will be released by the Australian Bureau of Statistics (ABS) next Tuesday.
Westpac economists also expect annual wage growth to reach 3 percent by the end of June as the labor shortage moves to larger wage increases from employers to attract and retain employees.
The shortage of available workers was highlighted by data released today from the ABS office – shortly after the publication of Westpac’s new forecast – which showed the unemployment rate at 4.2 percent in December, the lowest level since August 2008.
That number adds weight to Westpac’s forecast of an unemployment rate of 4 percent by the middle of this year, and 3.8 percent by the end of 2022.
While Westpac economists expect the Omicron COVID-19 variant to affect the Australian economy, they also expect the impact to be temporary, although they note the risks of future variables and virus waves, especially during the winter.
Economists also expect that reopening borders will reduce some of the labor shortages that are starting to raise wages.
“Increasing wage pressures and tightening labor markets are important preconditions for this outlook,” Evans noted.
The cash flow ratio is expected to reach 1.75 percent
Aside from bringing forward the timing of the first six-month rate hike, Westpac also changed its forecast for the number of rate increases that would be required to keep inflation in check.
It previously expected the cash rate to reach a maximum of 1.25 per cent during the current cycle, but now it is tipped to peak at the cash rate at 1.75 per cent by March 2024, although Evans says official interest rates in Australia are likely. It peaks at a level slightly lower than that in the United States.
However, this is a 1.65 percentage point increase over the Reserve Bank of Australia’s current cash rate of 0.1 per cent.
With Reserve Bank numbers showing the average current variable borrower at a rate just under 3 percent, that would take typical mortgage rates above 4.6 percent.
RateCity analysis shows that it would cost someone with a typical mortgage of $500,000 and an additional $427 per month in repayment after March 2024.
“While the exact timing of the next rate hike remains uncertain, borrowers need to know that rates are going up – it’s just a matter of time,” said Sally Tindall, director of research at RateCity.
“Recent APRA data shows that the average borrower is currently 45 months ahead of their payments, however, this does not mean that every borrower will be able to withstand these rate hikes.
“One way you can prepare for price hikes in the future is to go ahead with your payments now while prices are still low.
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