RBA Interest Rate Forecast: How Much Will Cash Interest Rate Rise?

The RBA is expected to raise interest rates again on Tuesday – and for months to come – sparking warnings that Australian families will be “devastated” by the charges.

All eyes are on the Reserve Bank of Australia (RBA), which will make its June rate decision tomorrow.

Economists everywhere are tipping the RBA to raise the official cash interest rate (OCR) again from its current level of 0.35 percent; although opinions are divided on the choice of a traditional increase of 0.25 percent or a sharper increase.

The RBA is also expected to aggressively raise interest rates in the coming year. Median economists predict that OCR will peak at about 2.5 percent, consistent with RBA Governor Phil Lowe’s statement in May, in which he said he expects to raise target cash interest rates to at least 2.5 percent.

The futures market is even more aggressive, with the RBA tipping the OCR to about 3.5 percent by May 2023.

Projected interest rate hikes would wreck household finances

Assuming economists or the market’s OCR forecasts are fully passed on to mortgage holders, the average variable mortgage interest rate would rise from its current level of 3.7 percent to between 5.85 percent and 6.85 percent by mid-2023.

This would represent the sharpest proportional rise in mortgage rates in Australia’s history and would devastate household finances, the housing market and the Australian economy.

To illustrate why, consider the following table showing the average monthly home repayment at the median price across Australia, assuming a 30-year principal and a variable-rate mortgage and a 20 percent down payment:

If economists’ forecast comes true and OCR rises another 2.15 percent (to 2.5 percent), the average monthly mortgage payment on the average Australian home would rise by $781, or 28 percent. The impact would be greatest in Sydney, where monthly mortgage payments would increase by $1163.

If the futures market forecast comes true and the OCR rises another 3.15 percent (to 3.5 percent), the average monthly mortgage payment on the median-priced Australian home would rise by $1,174 (42 percent), with repayments in all of Sydney. at $1748 per month.

The impact would be even more severe for borrowers who took out fixed-rate mortgages at rock bottom rates of less than 2.5 percent during the height of the pandemic.

According to economists’ OCR forecast, these fixed-rate borrowers would see mortgage rates more than double on refinancing in 2023 and 2024, while mortgage rates would triple, according to the market’s OCR forecast.

With approximately $500 billion in fixed-rate mortgage terms expiring by the end of 2023, hordes of Australian households face a devastating shock to their mortgage resettlement.

The economy could be thrown into a recession

Household consumption is the biggest driver of the Australian economy and accounts for about 55 percent of growth on average. So if mortgage payments rise too much, it means there is less money available for spending across the economy, which in turn crushes economic growth.

Negative pressures on household consumption would be exacerbated by a sharp fall in house prices, leaving Australians feeling poorer.

The cratering of mortgage rates to record lows during the pandemic was the main driver of the generational housing price boom in Australia. Rising interest rates would have the opposite effect in bringing about a major correction in house prices.

In its latest Financial Stability Review, the RBA estimated “that a 200 basis point rise in interest rates from current levels would lower real house prices by about 15 percent over two years.”

Therefore, economists’ 2.5 percent OCR forecast suggests a peak-to-fall in real Australian house prices of more than 15 percent, with par values ​​falling by more than 20 percent.

However, the 3.5% OCR of the futures market would crash the housing market, with real house prices falling by about 25 percent in real terms and more than 30 percent in nominal terms, according to the RBA’s model.

Aggressive interest rate hikes won’t stop inflation

Inflationary pressures in Australia are mainly imported, including through petrol prices and materials.

The broadest measure of domestic inflation – wages – remains weak, despite the tight labor market. The March wage price index showed an annual growth of just 2.35 percent, while the national accounts from the first quarter of last week showed only 2.2 percent growth in average pay per employee.

Most telling is the Australian real unit labor cost (ULC), which, according to the Australian Bureau of Statistics, is “an indicator of the average labor cost per unit of output produced in the economy” and is “a measure of the costs associated with with the employment of labor adjusted for labor productivity.” They have collapsed 6.3 percent below their pre-pandemic levels and have fallen for the better part of 35 years.

Clearly, the RBA is not facing a wage-price spiral like that seen in some other jurisdictions, and does not need to crack down on wage growth by aggressively raising OCR. On the contrary, wages in Australia are disinflationary given the declining ULC.

As such, there is little justification for the RBA to aggressively raise rates to counter imported (cost-increasing) inflation. Such a strategy would increase cost of living pressures on households and kick the economy up a gear without alleviating the forces that created the inflation problem in the first place.

The government must help the RBA fight inflation

The biggest risk to Australian inflation is through an energy crisis that is also being imported by bellicose gas and coal companies.

The only permanent solution to this is for the Australian government to reserve sufficient domestic volumes of gas and coal to drive down local prices. Possibly with fixed prices.

Energy is only 3 percent of the CPI, but it’s already on its way to doubling, and because it’s a cost to every other business, all costs will go up and so will end-user prices.

If nothing is done to remedy the energy crisis, the RBA could be forced to raise interest rates higher than the economy generally can handle to make room for an empty energy price shock.

That would be pointlessly destructive to Australian living standards.

Leith van Onselen is chief economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

David Llewellyn-Smith is chief strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding editor and editor of Global Economy of The Diplomat, the leading portal for geopolitics and economics in Asia. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review. MB Fund is underweight Australian iron ore mines

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