Borrowers are in for even more bad news as Westpac expects an additional interest rate next year to tackle its worst inflation in three decades.
The bank’s chief economist Bill Evans has revised Westpac’s forecasts to ensure that the Reserve Bank of Australia will raise its spot interest rate to a 10-year high of 3.6 percent by February next year.
Previously, Westpac expected a cash interest rate of 3.35 percent, with its new forecast at the higher end of what the Big Four banks expect.
Westpac sees the RBA cash rate reach its highest level since June 2012.
Should Westpac’s predictions come true, a borrower with an average loan of $600,000 would owe the bank $1,116 more per month compared to early May, when the cash interest rate was still at a record low of 0.1 percent.
Compared to now, this borrower would owe an additional $456 per month in February as their repayments increased from $2,966 to $3,422.
As late as May, this borrower would have owed $2,306 per month to pay off a typical loan with a lower floating rate.
Mr Evans said the RBA’s priority would be to tackle the worst inflation in 32 years, with an additional 0.25 percentage point rate hike, compared to Westpac’s earlier forecast, intended to “achieve its target of wring inflation out of the system’.
“Given these extreme conditions surrounding the build-up of inflationary pressures, central banks will adopt the policy of ‘least regret’,” he said.
“That will be the mistake of limiting inflation in the short term at the expense of potential growth.”
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Borrowers face more bad news with Westpac expecting an additional interest rate next year to tackle worst inflation in three decades (pictured is an auction in Melbourne)
Borrowers since May have endured five consecutive monthly rate hikes, pushing the cash interest rate to a seven-year high of 2.35 percent.
What the big banks now expect
WESTPAC: 3.6 percent spot interest by February 2023 (versus 3.35 percent)
COMMON BANK: 2.85 percent spot interest in November (versus 2.6 percent)
ANZ: 3.35 percent cash rate in December (from November)
NAB: 2.85 percent spot interest in November
The 2.25 percentage point rate hikes marked the most aggressive monetary policy tightening since 1994, ending the pandemic era of record-low cash interest rates of 0.1 percent.
Westpac expects another 0.5 percentage point rate hike in October, which would push the cash interest rate to a nine-year high of 2.85 percent.
This would also be above the 2.5 percent level that Reserve Bank governor Philip Lowe considers neutral, and would be the fifth consecutive 50 basis point rate hike.
Mr Evans said that Dr. Lowe on Friday before the House Economics Committee convinced him that the RBA would prefer to raise interest rates at a more aggressive pace.
“There were important comments during Friday’s parliamentary hearing that suggest he will choose a higher interest rate before deciding to slow down the pace of tightening,” he said.
“We now expect the Governor to decide to push the price more clearly towards his best estimate of the contraction zone before scaling back the pace of increases.”
The bank’s chief economist Bill Evans has revised Westpac’s forecasts to ensure that the Reserve Bank of Australia will raise its spot interest rate to a 10-year high of 3.6 percent by February next year. Previously, Westpac expected a cash interest of 3.35 percent (shown is a Westpac branch in Sydney)
dr. Lowe described inflation as a “plague” on Friday.
“High inflation is hurting our economy, exacerbating inequality and devaluing people’s savings,” he said.
“High inflation also makes it very difficult to maintain or increase real wages, so it’s a scourge.”
Inflation rose 6.1 percent in the year to June, a level more than double the RBA bank’s target of 2 to 3 percent.
The RBA and Treasury both expect headline inflation to reach a 32-year high of 7.75 percent by the end of 2022.
dr. Lowe clearly hinted Friday that it would continue to tighten monetary policy.
“The RBA will do whatever it takes to ensure that higher inflation does not become entrenched, and we are committed to bringing inflation back to the target range of two to three percent,” he said.
Westpac said the RBA’s priority would be to tackle the worst inflation in 32 years, with an additional interest rate hike of 0.25 percentage points, compared to Westpac’s earlier forecast, intended to “achieve the goal of curbing inflation.” wring the system’ (pictured is a terrace in Sydney at the market)
‘And we want to do that in a way that keeps the economy going.
“I think it is possible to achieve this, but the path here is narrow and shrouded in uncertainty.”
The Commonwealth Bank, Australia’s largest mortgage lender, expects inflation to reach 7.25 percent by the end of 2022, but moderate in 2023 to 2.9 percent by the end of 2023.
In contrast, the RBA expects headline inflation to reach 4.3 percent by the end of 2023.
Nevertheless, Gareth Aird, the Commonwealth Bank’s head of Australian economy, expects the RBA to cut rates again by the end of 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 could cut rates as Australia, unlike other developed economies, has now seen a wage-price spiral.
Reserve Bank of Australia Governor Philip Lowe (pictured) told the House Economic Committee that high inflation was a “scourge” and convinced economists that the RBA would pursue aggressive monetary policy tightening
“Australia is not in a wage-price spiral as seen in some other jurisdictions,” he said.
“By extension, the RBA doesn’t have to run as hard as other central banks against inflation and wages,” said Mr Aird.
“The RBA does want wage growth to continue to rise.”
The Australian wage price index grew by 2.6 percent in the period to June, less than half the inflation rate of 6.1 percent.
Wage growth has remained below the long-term average of 3 percent since 2013, and the Commonwealth Bank expects it to reach 3.5 percent by mid-2023.
Wage growth is still subdued despite an unemployment rate in August of just 3.5 percent, a level only slightly above the 48-year low in July of 3.4 percent.
What borrowers could pay by February next year compared to May 2022
$500,000: $930 up to $2,852 from $1,922
$600,000: $1,116 up to $3,422 from $2,306
$700,000: $1,302 up to $3,993 from $2,691
$800,000: $1,488 up to $4,563 from $3,075
$900,000: $1,674 up to $5,133 from $3,459
$1,000,000: $1,861 up to $5,704 from $3,843
Forecasts comparing a 10-year high spot rate of 3.6 percent in February 2023 with a record low spot rate of 0.1 percent in May 2022, based on Westpac forecasts. Monthly repayments reflect a typical Commonwealth Bank variable loan increasing to 5.54 percent from 2.29 percent