Westpac is now expecting the Reserve Bank cash rate to hit a 10-year high of 3.35 per cent by February next year.
Chief economist Bill Evans was previously expecting interest rates to peak at 2.6 per cent in early 2023 during this tightening cycle.
But now Westpac has joined ANZ in forecasting the cash rate surging to 3.35 per cent, which would be the highest level since October 2012.
Westpac is predicting that will occur by February 2023 while ANZ is expecting that to happen in November this year with more severe rate rises by Melbourne Cup Day.
‘Higher interest rates will also add pressure to the housing market where a price correction is already underway,’ Mr Evans said.
Westpac sees the Reserve Bank leaving the cash rate at 3.35 per cent until early 2024, before cutting rates again.
An average borrower with a $600,000 mortgage would see their monthly mortgage repayments surge by another $708, compared with now, should the RBA cash rate hit 3.35 per cent.
This borrower’s monthly repayments would also be $1,060 more than where they were in May before the Reserve Bank raised rates for the first time since November 2010, despite governor Philip Lowe last year promising no increase until 2024.
Westpac is now expecting the Reserve Bank cash rate to hit a 10-year high of 3.35 per cent by February next year
What the big banks are NOW predicting
WESTPAC: 3.35 per cent cash rate by February 2023
This would include 50 basis point increases in August and September and 25 basis point rises in October, November, December and February
ANZ: 3.35 per cent cash rate by November 2022
This would include 50 basis point increases in August, September, October and November
COMMONWEALTH BANK: 2.6 per cent cash rate by November
This would include 50 basis point rate rises in August and September and a 25 basis point rise in November
NAB: 2.85 per cent cash rate by November
This would include 50 basis point increases in August and September and 25 basis point rises in October and November
Under Westpac’s forecasts, the RBA would raise rates by 0.5 percentage points in both August and September, followed by 0.25 percentage point increases in October, November, December and February.
National Australia Bank on Friday also updated its forecasts, now expecting a cash rate of 2.85 per cent by November instead of 2.6 per cent as previously predicted.
Reserve Bank rate rises May, June and July have taken the cash rate to a three-year high of 1.35 per cent.
The increase from a record-low of 0.1 per cent has also marked the steepest pace of monetary policy tightening since 1994.
Another 200 basis points of rate rises, as Westpac and ANZ are predicting, would mark the steepest pace of rate increases in less than a year since the Reserve Bank began publishing a target cash rate in 1990.
Dr Lowe this week said a 2.5 per cent cash rate was more likely but only the Commonwealth Bank, predicting a 2.6 per cent cash rate by November, comes close.
New inflation data for the June quarter, due out on July 27, could see the Reserve Bank impose an even bigger 75 basis point rate rise in August, which would next month take the cash rate to a seven-year high of 2.1 per cent.
The Commonwealth Bank, along with the other big four lenders, are all expecting the Reserve Bank of Australia to next month raise the cash rate by 50 basis points, or 0.5 percentage points, to a six-year high of 1.85 per cent.
But CBA’s head of Australian economics Gareth Aird said there was an outside chance of a 75 basis point increase on August 2, taking the cash rate to seven-year high of 2.1 per cent from the existing three-year high level of 1.35 per cent.
The Commonwealth Bank’s head of Australian economics Gareth Aird said there was an outside chance of a 75 basis point increase on August 2, taking the cash rate to seven-year high of 2.1 per cent from the existing three-year high level of 1.35 per cent
Mr Aird said a ‘material upside surprise’ to inflation data for the June quarter, due out on July 27, would ‘raise the risk of a 75 basis point increase at the August board meeting’
This would also be the steepest monthly rise since December 1994, meaning a borrower with an average $600,000 mortgage would cop another $256 increase in their monthly mortgage repayments on top of the $352 increase they have endured since May.
Mr Aird said a ‘material upside surprise’ to inflation data for the June quarter, due out on July 27, would ‘raise the risk of a 75 basis point increase at the August board meeting’.
The Commonwealth Bank is expecting headline inflation in the year to June to have surged by 6.2 per cent – the fastest pace since 1990.
But a bigger increase than what the banks and financial markets are expecting could spark a bigger official rate rise.
‘At the moment market pricing sits between the 50 basis point hike we expect and a 75 basis point increase for the August board meeting, where some market participants are placing their views,’ Mr Aird said.
The 30-day interbank futures market is predicting a 50 basis point rate rise in August and a cash rate of 3.8 per cent by March 2023.
Russia’s Ukraine invasion has pushed up petrol prices back above $2 a litre while recent flooding on Australia’s east coast has made vegetables more expensive.
‘Input costs have risen in part due to supply side bottlenecks and the war in Ukraine,’ Mr Aird said.
An average borrower with a $600,000 mortgage would see their monthly mortgage repayments surge by another $708, compared with now, should the RBA cash rate hit 3.35 per cent (pictured are homes in Melbourne)
A borrower with an average, $600,000 mortgage is now paying $2,658 a month on their repayments, under a Commonwealth Bank variable rate of 3.39 per cent.
But a rise in the cash rate to 3.35 per cent would see their monthly repayments climb by another $708 to $3,366 as CBA’s variable rate rose to 5.39 per cent.
As recently as May, this CBA borrower was paying $2,306 under a 2.29 per cent variable rate.
CBA trimmed its variable rates by 15 basis points in late June before putting them up by 50 basis points in July to reflect the latest RBA increase.
The Reserve Bank’s tightening cycle began in May after the Australian Bureau of Statistics, on April 27, revealed headline inflation in the year to March had soared by 5.1 per cent – the fastest pace since 2001.
This was well above the central bank’s 2 to 3 per cent target.
What a surge in the cash rate to 3.35 per cent would mean for you
$500,000: Up $590 from $2,215 to $2,805
$600,000: Up $708 from $2,658 to $3,366
$700,000: Up $826 from $3,1010 to $3,927
$800,000: Up $944 from $3,544 to $4,488
$900,000: Up $1,062 from $3,987 to $5,049
$1,000,000: Up $1,180 from $4,430 to $5,610
Figures are based on the cash rate rising from 1.35 per cent to 3.35 per cent, causing a popular Commonwealth Bank variable rate to surge from 3.39 per cent to 5.39 per cent