Borrowers are in for more bad news with Westpac expecting an extra interest rate next year to tackle the worst inflation in three decades.
The bank’s chief economist Bill Evans has revised Westpac’s forecasts to have the Reserve Bank of Australia raising the cash rate to a 10-year high of 3.6 per cent by February next year.
Previously, Westpac was expecting a 3.35 per cent cash rate, with its new prediction at the top end of what the Big Four banks are expecting.
Westpac sees the RBA cash rate hitting the highest level since June 2012.
Should Westpac’s forecasts come true, a borrower with an average $600,000 loan would be owing $1,116 more a month to the bank, compared with early May when the cash rate was still at a record low of 0.1 per cent.
Compared with now, this borrower would owe an extra $456 a month by February, as their repayments climbed to $3,422 from $2,966.
As recently as May, this borrower would have owed $2,306 a month paying off a typical loan with a lower variable rate.
Mr Evans said the RBA’s priority would be tackling the worst inflation in 32 years, with an extra 0.25 percentage point rate rise, compared with Westpac’s earlier forecast, designed to ‘achieve the objective of wringing inflation out of the system’.
‘Given these extreme circumstances around the build up of inflationary pressures central banks will take the policy of “least regret”,’ he said.
‘Which will be to err on the side of containing inflation at the potential cost of growth in the near term.’
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Borrowers are in for more bad news with Westpac expecting an extra interest rate next year to tackle the worst inflation in three decades (pictured is a Melbourne auction)
Borrowers since May have endured five straight monthly interest rate increases, taking the cash rate to a seven-year high of 2.35 per cent.
What the major banks are now expecting
WESTPAC: 3.6 per cent cash rate by February 2023 (up from 3.35 per cent)
COMMONWEALTH BANK: 2.85 per cent cash rate by November (up from 2.6 per cent)
ANZ: 3.35 per cent cash rate by December (out from November)
NAB: 2.85 per cent cash rate by November
The 2.25 percentage points of rate rises have marked the most aggressive monetary policy tightening since 1994, ending the pandemic-era of a record-low 0.1 per cent cash rate.
Westpac is expecting another 0.5 percentage point rate rise in October that would take the cash rate to a nine-year high of 2.85 per cent.
This would also be above the 2.5 per cent level the Reserve Bank Governor Philip Lowe considers to be neutral, and would be the fifth straight 50 basis point rate increase.
Mr Evans said Dr Lowe’s appearance on Friday before the House of Representatives Economics Committee had convinced him the RBA would prefer to increase rates at a more aggressive pace.
‘There were significant remarks in the parliamentary hearing on Friday that suggest he will err on the side of a higher rate before deciding to scale back the pace of tightening,’ he said.
‘We now expect the Governor to decide to push the rate more clearly into his best estimate of the contractionary zone before scaling back the pace of increases.’
The bank’s chief economist Bill Evans has revised Westpac’s forecasts to have the Reserve Bank of Australia raising the cash rate to a 10-year high of 3.6 per cent by February next year. Previously, Westpac was expecting a 3.35 per cent cash rate (pictured is a Westpac branch in Sydney)
Dr Lowe on Friday described inflation as a ‘scourge’.
‘High inflation damages our economy, it worsens inequality and it devalues people’s savings,’ he said.
‘High inflation also makes it very difficult to sustain or increase real wages, so it’s a scourge.’
Inflation in the year to June surged by 6.1 per cent, a level more than double the RBA bank’s 2 to 3 per cent target.
The RBA and Treasury are both expecting headline inflation to hit a 32-year high of 7.75 per cent in late 2022.
Dr Lowe on Friday strongly hinted it would continue pursuing tighter monetary policy.
‘The RBA will do what’s necessary to make sure that the higher inflation does not become entrenched, and we are committed to returning inflation to the two to three per cent target range,’ he said.
Westpac said the RBA’s priority would be tackling the worst inflation in 32 years, with an extra 0.25 percentage point rate rise, compared with Westpac’s earlier forecast, designed to ‘achieve the objective of wringing inflation out of the system’ (pictured is a Sydney terrace on the market)
‘And we’re seeking to do this in a way that keeps the economy on an even keel.
‘I think it is possible to achieve this, but the path here is a narrow one and it’s clouded in uncertainty.’
The Commonwealth Bank, Australia’s biggest home lender, is expecting inflation to hit 7.25 per cent in late 2022 but moderate in 2023 to 2.9 per cent by the end of 2023.
The RBA is conversely expecting a 4.3 per cent headline inflation rate by the end of 2023.
Nonetheless Gareth Aird, the Commonwealth Bank’s head of Australian economics, is expecting the RBA to cut interest rates again late next year.
‘We have 50 basis points of rate cuts in our profile for the second half of ’23,’ he said.
Mr Aird said the RBA would be able to cut rates because Australia, unlike other developed economies, has now seen a wage-price spiral.
Reserve Bank of Australia Governor Philip Lowe (pictured) told the House of Representatives Economics Committee high inflation was a ‘scourge’ and convinced economists the RBA would pursue aggressive monetary policy tightening
‘Australia is not in a wage-price spiral like is being observed in some other jurisdictions,’ he said.
‘By extension the RBA does not need to run as hard as other central banks against inflation and wages,’ Mr Aird said.
‘Indeed the RBA wants wages growth to continue to rise.’
Australia’s wage price index in the year to June grew by 2.6 per cent, less than half the inflation rate of 6.1 per cent.
Wages growth has been stuck below the long-term average of 3 per cent since 2013 and the Commonwealth Bank is expecting it to hit 3.5 per cent by mid-2023.
Pay level growth is still subdued despite an unemployment rate in August of just 3.5 per cent, a level only slightly above July’s 48-year low of 3.4 per cent.
What borrowers could be paying by February next year compared with May 2022
$500,000: Up $930 to $2,852 from $1,922
$600,000: Up $1,116 to $3,422 from $2,306
$700,000: Up $1,302 to $3,993 from $2,691
$800,000: Up $1,488 to $4,563 from $3,075
$900,000: Up $1,674 to $5,133 from $3,459
$1,000,000: Up $1,861 to $5,704 from $3,843
Forecasts comparing a 10-year high cash rate of 3.6 per cent in February 2023 with a record-low 0.1 per cent cash rate in May 2022, based on Westpac forecasts. Monthly repayments reflect a typical Commonwealth Bank variable loan rising to 5.54 per cent from 2.29 per cent