Big four bank Westpac has dramatically reduced its forecast for when interest rates will begin to rise in Australia, predicting that it’s likely the cost of lending will increase from as early as August this year.In a research note, Westpac’s chief economist Bill Evans said he now expects the Reserve Bank of Australia (RBA) to begin lifting the official cash rate at its meeting on August 2, 2022.He expects a hike of 15 basis points in August to be followed by a further hike of 25 basis points in October.
Interest rates are at the all-time record low of 0.10 per cent, having been slashed multiple times in the early days of the pandemic to reduce costs for businesses that effectively had their customer base wiped out.Mr Evans said the bank now expects rates to climb as high as 1.75 per cent by early 2024.”We have not changed our call for the first hike in the overnight cash rate by the RBA since June 2021 when we were early to challenge the ‘not ’til 2024′ consensus,” Mr Evans wrote.
“Our ‘target’ then was a first hike at the February Board meeting in 2023.”Developments since then have now prompted us to bring forward that tightening date to the meeting on August 2, 2022.”
As Mr Evans alluded, RBA Governor Philip Lowe has repeatedly indicated the central bank would not lift rates until late 2023 or early 2024 – or until underlying inflation lifts sustainably.But Westpac believes underlying inflation will rise far earlier than the RBA’s expectations, forcing their hand to lift interest rates earlier than indicated.”There is also the likelihood that, over the long run, interest rates in Australia and the US are unlikely to settle too far out of alignment,” Mr Evans wrote.”For these reasons, we have lifted the terminal rate to 1.75 per cent from the 1.25 per cent we estimated back in June.”The exact profile for rate rises would be 40 basis points in 2022; 100 basis points in 2023; with one final move of 25 basis points in early 2024.”
The chief economist did warn a risk to his forecast was another variant of COVID-19 sweeping through Australia, although the RBA has noted it plans to restart the national recovery in the midst of new COVID-19 challenges.”One important risk to this rate and growth view is a further rise in COVID infections and hospitalisations near term or further out as the effectiveness of boosters and post-infection immunity wears off – the latter likely to be around mid-2022 when winter will be upon us and the virus tends to spread more freely (although evidence from the severe northern winters is not entirely relevant for Australia’s mild winters),” wrote Mr Evans.”The line the RBA used around the Delta lockdowns was that it would ‘delay but not derail’ the recovery.”That may mean that our timing for the first move turns out to be too early but the cycle would not be abandoned.”
For the average variable rate borrower with $500,000 owing on their mortgage, repayments could rise by $103 a month by the end of October if Westpac’s forecast is realised.Sally Tindall, research director at RateCity.com.au, said borrowers should be anticipating their mortgage to become more expensive in the coming years.”While the exact timing of the next cash rate hike is still not certain, borrowers need to know that rates are on the rise – it’s just a matter of when,” she said.”Recent APRA data shows the average borrower is currently 45 months ahead on their repayments, however, that doesn’t mean every borrower will be able to take these rate hikes in their stride.”One way you can prepare for future hikes is to get ahead on your repayments now while rates are still low. The lower your loan size when rates do rise, the less pain you’ll feel.”
Published by Stuart Marsh for 9 News Australia