Commonwealth Bank warns of biggest rate hike in nearly 30 years
Australia’s biggest home lender fears borrowers in August could cope with their biggest monthly rate hike in nearly three decades if there is an inflation shock next week.
Commonwealth Bank, along with four other major lenders, all expect the Reserve Bank of Australia next month to raise interest rates by 50 basis points, or 0.5 percentage points, to a six-year high of 1.85 percent.
But CBA’s chief economist for Australia Gareth Aird said there was an outside chance of a 75 basis point hike on Aug. 2, bringing interest rates to a seven-year high of 2.1 percent from a three-year high of 1.35 percent.
It would also be the steepest monthly increase since December 1994, meaning borrowers with an average mortgage of $600,000 would overcome another $256 increase in their monthly mortgage payments on top of the $352 increase they had experienced since May.
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Australia’s biggest home lender fears borrowers in August could cope with their biggest monthly rate hike in nearly three decades if there is an inflation shock next week (pictured is a Sydney bank branch)
Aird said a ‘material upside surprise’ to inflation data for the June quarter, due for release on July 27, would ‘increase the risk of a 75 basis point gain at the August board meeting’.
The Commonwealth Bank expects headline inflation for the year to June to jump 6.2 percent – the fastest pace since 1990.
But a bigger-than-expected increase by banks and financial markets could trigger a bigger official rate hike.
“Right now market prices are somewhere between the 50 basis point gain we expected and the 75 basis point increase for the August board meeting, where some market participants are placing their views,” Aird said.
The 30-day interbank futures market is forecasting a 50 basis point rate hike in August.
Russia’s invasion of Ukraine has pushed gasoline prices back above $2 per liter while recent flooding on Australia’s east coast has made vegetables more expensive.
“Input costs have increased in part due to supply-side bottlenecks and the war in Ukraine,” Aird said.
But CBA’s chief economist for Australia Gareth Aird said there was an outside chance of a 75 basis point hike on Aug. 2, bringing interest rates to a seven-year high of 2.1 percent from a three-year high of 1.35 percent.
‘And flooding on Australia’s east coast has disrupted fruit and vegetable production which has put significant pressure on food prices at both wholesale and retail levels.’
Unemployment and pension benefits will be indexed on Sept. 20 to reflect rising March and June quarter inflation.
Headline inflation in the year to March rose by 5.1 percent – the steepest increase since 2001 – with the Australian Bureau of Statistics releasing the data on April 27.
Less than a week later, on May 3, The Reserve Bank in May raised interest rates for the first time since November 2010, ending an era of record-low 0.1 percent cash rates with a 25 basis point increase.
The RBA followed this up in June with a 50 basis point rate hike – the biggest monthly increase since February 2000.
Borrowers in July saw another half a percentage point gain, bringing the cash rate to a three-year high of 1.35 percent.
The 125 basis point gain since May marked the sharpest pace of monetary policy tightening since 1994.
ANZ chief economist David Plank also expects a 50 basis point gain next month but like the CBA, is concerned about a possible 75 basis point gain in August.
“We think a move of more than 50 basis points in August or September is a very real possibility, though not the main case,” he said.
“It could be more than 75 basis points, or even 65 basis points if the RBA wants to ’round’ the interest rate target to 0.25 percent.”
Deutsche Bank Australia chief economist Phil O’Donaghoe forecast a 75 basis point increase in August with an outside chance of a 100 basis point increase.
The Commonwealth Bank expects the RBA’s interest rate to peak at 2.6 percent by the end of 2022 or early 2023 if rates in August rise 50 basis points.
That’s in line with Reserve Bank of Australia Governor Philip Lowe signaling a 2.5 percent peak during this cycle of monetary policy tightening.
“We have more rate hikes coming up,” he told the Australian Strategic Business Forum this week.
The Commonwealth Bank expects headline inflation for the year to June to jump by 6.2 percent – the fastest pace since 1990. But a bigger-than-expected increase by banks and financial markets could trigger larger official rate hikes (pictured is the auction Melbourne)
‘Two and a half percent is our rough estimate of the neutral rate.’
But ANZ expects 50 basis point rate hikes in August, September, October and November that will bring the cash rate to a 10-year high of 3.35 percent.
If the RBA rate rose 75 basis points in August, borrowers with an average mortgage of $600,000 would see their monthly payments rise $256 from $2,658 to $2,914.
That was based on the Commonwealth Bank raising the interest rate on its popular variable loan from 3.39 percent to 4.14 percent.
A 0.75 percentage point increase in interest rates in August also means these $600,000 borrowers since May will see a $608 increase in their monthly payments since their variable interest rate jumped from 2.29 percent just three months ago.
Even before the next possible rate hike in August, average borrowers had seen their monthly payments rise by $352.
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