All signs now pointing to a June interest rate hike

More than one million home loan borrowers could experience their first ever interest rate hike in June, according to forecasts by many of the nation’s top economists.

The Reserve Bank of Australia on Tuesday held interest rates steady at a record low of 0.1%, however a shift in language in its post-meeting statement signalled its board was preparing to move within months.

The removal of a key line saying the board was “prepared to be patient” prompted several economists to bring forward their interest rate forecasts to June, with some even ruling in the chance of a May lift-off.

And once the hikes start, the speed at which they rise may catch many borrowers by surprise.

What economists are forecasting
Since Tuesday’s RBA meeting, economists at Westpac, ANZ, NAB and Macquarie have brought forward their interest rate forecasts, bringing them in line with the Commonwealth Bank and AMP who have tipped a June hike for several months.

Westpac chief economist Bill Evans – who updated his forecasts on Thursday – said the hawkish shift had come as a surprise, noting the timing showed the RBA was willing to risk political controversy.

“The Reserve Bank governor surprised us on Tuesday with the board’s decision to abandon its patient approach to monetary policy,” Mr Evans said.

“And recall that this shift by the RBA board, from a ‘patient’ to a more pro-active approach to monetary policy – is in the context of an election campaign that will be fought through most of April and the first half of May.

“Being aware of such complications but still being prepared to change the stance emphasises the board’s determination to change the policy message,” Mr Evans said.

Another change in message, NAB chief economist Alan Oster noted, was in the RBA’s outlook on policy settings.

Before the pandemic, the RBA was prepared to change interest rates based on its economic forecasts, however over the past two years it has wanted to see ‘actual’ evidence inflation is sustainably sitting within its 2-3% target range.

“The RBA has moved from being backward looking to more forward looking with the board’s pandemic policy settings and desire to see actual evidence of inflation sustainably at target no longer written in future tense,” Mr Oster said.

PropTrack economist Paul Ryan said this was further signalled on Wednesday in a Senate estimates appearance by the RBA’s newly-promoted deputy governor Michele Bullock.

“The RBA has outlined in the Senate that they think underlying inflation is stronger than previously anticipated and are confident wages growth is building,” Mr Ryan said.

“This appears to be an about-face on how the RBA is setting policy – moving away from the rhetoric that relied on measured inflation and wages growth to moving based on forecasts, that prevailed prior to the pandemic.”

Mr Ryan said next month’s meeting will be one to watch given the RBA is also due to release its latest economic forecasts, in its quarterly Statement on Monetary Policy (SOMP).

“The RBA will almost certainly wait until a SOMP release to start that [rate hike] process so that they can explain exactly why they’re raising rates and how that relates to their forecast for the future,” he said.

After May, the RBA will also put out updated economic forecasts in August and November.

“Those are the three dates that the RBA would choose to embark on this hiking cycle, almost definitely,” Mr Ryan said.

“We’re bouncing between August and November. We’re not putting much stock in May given conditions,” he said.

“August seems more likely given how strong inflation has been.”

How high will interest rates go?
While many economists are aligned on when interest rates will begin rising, they’re divided on how fast and high they’ll go.

Of the major banks, economists at CBA are forecasting the lowest cash rate peak at 1.25%, while ANZ sees rates ‘eventually’ rising to 3% or more, although not until some time after 2023.

Westpac’s new forecasts predict rate hikes in June, July, August, October and November this year, taking the cash rate to 1.25% by the end of 2022, before peaking at 2% by mid 2023.

“While we have accelerated the pace of rate hikes in 2022 with a peak of 1.25% by year’s end we have only lifted the expected terminal rate from 1.75% to 2%,” Mr Evans said.

“This 2% will nevertheless result in a significantly higher debt servicing ratio for the household sector than in the 2009-10 tightening cycle.”

Forecasts current at time of publication on  7 April 2022.

Mr Evans noted increased household savings would act as a buffer against higher interest rates.

“But there will still be considerable sensitivity to the higher rates,” he said.

“Consider for example the wave of fixed rate borrowers that took out 2% loans during the pandemic – this group is set to roll onto mortgage rates more than double their original rate over the course of 2023 and 2024.”

How much will it cost borrowers?

Borrowers who have recently taken out a mortgage could be in for a shock when interest rates do begin to rise, with some facing hundreds or even thousands of dollars extra each month if these forecasts are realised.

Analysis of recent home sales in Australia’s capital cities shows a borrower who purchased a median priced house in Sydney between December 2021 and February 2022 could be forced to pay an additional $1900 a month if interest rates rose by 3%.

Given the RBA typically increases rates in 0.25% increments, reaching anywhere near those levels would take quite some time.

Still, the potential hit to household budgets is a concern held by many, with that issue put to Ms Bullock during the Senate estimates hearing.

“In November the RBA was signalling rates would be on hold until early 2024 and rate rises this year were very unlikely,” LNP Senator Gerard Rennick said.

“How did the RBA get that so wrong?” he asked, noting many borrowers had based their financial decisions on that guidance.

Ms Bullock replied: “We were in absolutely unusual times. I don’t think anyone at the beginning of the pandemic would have predicted that we’d be in a position now around the world where inflation was picking up so dramatically.

“I think the best thing to do in those circumstances is you look at the evidence and if the evidence is telling you that something else is happening then you change your view, and that’s what we’ve done,” she said.

Resource: realestate.com.au