RBA: Westpac predicts six rate hikes through March 2024
Australian borrowers could see their monthly repayments rise by about $500 over the next two years as the RBA hints at raising interest rates.
Australian borrowers could see their monthly repayments rise by about $500 over the next two years, with the central bank being tipped to hike interest rates as early as August.
The Reserve Bank has kept official interest rates steady at a record low of 0.1 percent since November 2020. Australia hasn’t seen a rate hike since November 2010 – and RBA Governor Philip Lowe has repeatedly said he doesn’t expect any hike until late 2023 at the latest.
But Westpac is now forecasting six rate hikes through early 2024 — in August 2022, October 2022, March 2023, June 2023, December 2023 and March 2024 — to take the policy rate from 0.1 percent to 1.75 percent.
Outlining its revised rate forecasts in a note on Thursday, Westpac Chief Economist Bill Evans said the bank previously expected the first rate hike in February 2023, but “developments since have now prompted us to push that tightening date to the meeting on September 1st August 2 preferable, 2022”.
“We now expect a 15 basis point hike in August to be followed by another 25 basis point hike in October,” Mr Evans said.
If Westpac’s predictions come true, the average 2.98 percent adjustable-rate borrower on a $500,000 mortgage would see repayments increase by $103 a month by the end of October.
For a $750,000 mortgage, the repayments would increase by $154, and for a $1 million mortgage, the increase would be $204.
By March 2024, repayments on the $500,000 mortgage would be $427 more per month than today, $641 on the $750,000 mortgage and $854 on the $1 million mortgage.
According to the latest data from the Australian Bureau of Statistics as of November 2021, the average home loan size in Australia is just under $596,000.
NSW borrowers had by far the highest loans averaging $769,000, followed by Victoria at $619,000, ACT at $586,000 and Queensland at $514,000.
CoreLogic data for 2021 showed the median price of homes rose 22.1 percent to $709,803, the fastest increase in a calendar year since 1989.
South Australia had the lowest average loan size at $422,000, followed by NT at $433,000, Western Australia at $440,000 and Tasmania at $446,000.
“While the exact timing of the next rate hike is uncertain, borrowers need to know that rates are rising — it’s just a matter of when,” Sally Tindall, RateCity’s research director, said in a statement.
“Recent APRA data shows that the average borrower is currently 45 months ahead on their repayments, but that doesn’t mean every borrower can take these rate hikes easily. One way you can prepare for future rate hikes is to start making payments now while interest rates are still low. The lower your loan size as interest rates rise, the less pain you will feel.”
Ms Tindall said now is a good time for variable-rate borrowers to review their current rate and potentially switch to a more competitive lender or ask their bank for a discount.
“That way they will at least come off a low level when the policy rate goes up,” she said.
“RBA data shows that the average existing customer with a variable rate has a rate of 2.98 percent, while the average new customer has a variable rate of 2.59 percent — that’s a 0.39 percent difference, by the way worth haggling. If you do manage to switch to a lower interest rate, you should consider reinvesting any savings back into your loan, which will also help minimize the impact of future rate hikes.”
In his report, Mr Evans said Westpac was revising its forecast for interest rates because it had “very different forecasts” for inflation, wage growth and unemployment than the RBA.
“We understand that the governor has firmly stated that he does not expect to hike rates until very late 2023 or 2024 and that expectation is fully consistent with the bank’s current economic forecasts,” he said.
The RBA projects that underlying inflation will reach 2.25 percent by the end of 2022 and 2.5 percent by the end of 2023, while wage growth will reach 2.5 percent in 2022 and 3 percent in 2023.
“Our forecast revisions reflect a much faster rise in inflation and wage growth than projected last June,” Mr Evans said.
“We now believe the RBA needs to venture into a mildly contractionary policy environment to address inflation/wage risks.”
Westpac expects underlying inflation to reach 2.4 percent in 2021, 2.6 percent in March 2022 and 2.9 percent in June 2022.
Unemployment is also much lower than the RBA predicted, adding pressure to raise interest rates.
The unemployment rate fell to 4.2 percent in December, the lowest level in more than 13 years.
Westpac expects unemployment to fall to 3.8 percent by the end of this year — the lowest rate since 1974.
Although Omicron is expected to have a major impact on consumer spending in January, cutting Australia’s growth by 0.5 per cent, Westpac expects a “solid recovery” later in the year.
“Westpac Economics now forecasts growth for 2021 and 2022 of 3.2 percent and 5.5 percent, respectively,” Mr Evans said.
“This is revised from the pre-Omicron profile of 2.8 percent and 6.4 percent, for a net reduction of 0.5 percent. We see no material implications for employment growth or wages/inflation from this correction.”