Banks warn Aussies are set for more painful rate rises ahead of next RBA meeting

Australians are being warned to brace for more rate pain as banks predict a grim outlook for the year ahead.

Mortgage rates are expected to rise again for the 10th time in a row after the Reserve Bank board meets on Tuesday.

But those hoping this will be the last of the rate hikes are in for a very big disappointment.

The big four banks – the Commonwealth, Westpac, ANZ and NAB – have all forecast a grim year ahead as the RBA tries to tame runaway inflation.

The current official cash rate is 3.35 per cent, but the banks expect the independent RBA will announce another 0.25 per cent hike at the meeting, taking it to 3.6 per cent – the highest it has been since September 2012.

AMP Capital’s chief economist Shane Oliver agreed the increase would “almost certainly” be handed down.

“Commentary from the RBA has been quite bleak,” he told NCA NewsWire.

“The difference of view (among financial experts) seems to be around how much further interest rates go.”

AMP Capital’s chief economist Shane Oliver said more rate rises are on the cards.

The reason the RBA is raising rates is to bring inflation under control.

Inflation reached a three decade high of 7.8 per cent in December, well above the RBA’s target rate of between 2 and 3 per cent.

“High inflation makes life difficult for people and damages the functioning of the economy,” RBA Governor Phillip Lowe said after the February rise.

“And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later.

“The board is seeking to return inflation to the 2–3 per cent range while keeping the economy on an even keel, but the path to achieving a soft landing remains a narrow one.”

Federal Treasurer Jim Chalmers, who has no say over the RBA board’s decision, said this week there were signs inflation was beginning to ease.

“I’m confident that we can get through this and I’m confident that the worst of inflation is behind us, rather than ahead of us,” Dr Chalmers said.

But he also acknowledged households are hurting.

“Interest rates are biting. Higher inflation has been biting in our economy. And we’re not immune from global conditions either,” he said.

Unfortunately experts agree that more pain is yet to come.

When will rates peak?

After the first monthly meeting of the year in February, Dr Lowe noted further rate increases could be necessary to beat inflation.

“The board expects that further increases in interest rates will be needed over the months ahead,” his statement said.

Following the dire declaration, Westpac, ANZ and NAB predicted interest rates would soar to 4.1 per cent by May.

RBA Governor Philip Lowe has foreshadowed further rate pain for Australians. Picture: NCA NewsWire / Gary Ramage

The three major banks predict interest rates will receive three 0.25 per cent increases in March, April and May.

If the prediction comes to pass, Australia will be facing the highest cash rate in 11 years.

Meanwhile, the Commonwealth Bank has been slightly more optimistic by forecasting two 0.25 per cent rate rises to reach a peak of 3.85 per cent in April.

Is Australia headed for recession?

Dr Oliver warned the country could slide into a recession if the Reserve Bank continues to raise interest rates at a rapid pace.

“The money market is close to predicting four more hikes and economists are predicting three more hikes,” he revealed.

“I suspect that would probably knock the economy into recession.”

AMP’s chief economist hopes the RBA will pause interest rates for a few months to allow the impact of the rises to trickle down to everyday Australians.

The ‘revenge spending’ boom after the pandemic is not expected to continue. Picture: NCA NewsWire/Gaye Gerard

“You can raise interest rates and nothing happens and you do it again and nothing happens,” he said.

“It takes a while for your bank to pass the mortgage rate hike onto you … and it takes a while for you to work out your bank account isn’t looking as good as it used to, and then adjust spending.”

The lag between the rate rise and the pain on the wallet has been lengthened by savings hoarded during the pandemic, Dr Oliver explained.

He said the central bank must strike a balance between necessary hikes to “cool down” the economy and excessive rises that “get carried away”.

What does this mean for home loans?

For the one third of homeowners facing ballooning mortgage repayments, Dr Oliver recognised “things are looking bleaker and bleaker”.

Governor Lowe told a senates estimates hearing earlier this month he had been flooded with letters from mortgage holders struggling with the impact of the consistent rate rises.

“I find it personally sort of disturbing, really, and people are really, really hurting. I understand that,” he said.

Predicted rate rises will bring further rate pain to everyday Aussies.

“But I also understand that if we don’t get on top of inflation, it means even higher interest rates. And more unemployment.”

Minutes from the recent RBA board meeting reveal that homeowners with variable home loans will be facing record high repayments after the foreshadowed rate rise on Tuesday.

“Interest rates on variable rate home loans had risen substantially over preceding months and required mortgage payments were projected to reach their highest level on record (as a share of household disposable income),” the minutes said.

RateCity data shows a homeowner with a mortgage of $500,000 will be paying $77 more per month in repayments if the RBA raises rates on Tuesday.

Mortgage holders will soon be forking out a record high on repayments. Picture: NCA NewsWire / Gaye Gerard

If interest rates continue to soar to the predicted peak of 4.1 per cent, mortgage holders will be left with a very pricy bill.

At the height of the cash rate in May, repayments on a $500,000 variable home loan would be $1154 more expensive than they were in April last year, according to RateCity data.

It’s a staggering increase of 49 per cent in a little over a year.

When will rates be cut?

Although the immediate future seems grim, both economists and banks estimate the central bank could start to slash interest rates within a year.

Dr Oliver notes the economic data that has emerged since the Reserve Bank meeting earlier this month suggests the nation may have already reached the peak of inflation.

“The RBA commentary points to a further hike but the economic data that we’ve seen since the last month suggests their hawkishness was overdone,” he told NCA NewsWire.

“I suspect that at some point the Reserve Bank will realise that they’re going a bit too far and they’ll cool things down.”

The Reserve Bank of Australia is expected to make painful announcements this year. Picture: NCA NewsWire / Christian Gilles

AMP Capital has “long thought” the central bank will begin to cut interest rates at the end of this year, the chief economist said.

The prediction is in line with more optimistic financial institutions such as the Commonwealth Bank, but ahead of banks such as Westpac.

The RBA won’t cut interest rates until 2024, Westpac predicts, but it will then embark on a slashing spree by making seven rate reductions.

Either way, experts agree it’s going to get worse for everyday Australians before it gets better.

Originally published as Banks warn Aussies are set for more painful rate rises ahead of next RBA meeting