CBA tips interest rates to reach 2.6 per cent by end of year

One Aussie bank is predicting a major rate rise by the end of the year and questioning whether households will cope.

Experts from the Commonwealth Bank expect interest rates to reach 2.60 per cent by the end of the year, which they fear may be too steep for some households.

They say RBA measures could result in some Aussie families tightening spending more than anticipated.

On Tuesday, Reserve Bank of Australia (RBA) Governor Philip Lowe reiterated the need for higher interest rates amid very low unemployment and inflation.

Australia’s interest rate stands at 1.35 per cent after starting the year at just 0.10 per cent.

Following Lowe’s speech, CBA experts affirmed their forecast for back-to-back 50bp increases in August and September, before a pause in October and a further lift of 25bp in November, taking the cash rate to 2.60 per cent.

The Commonwealth Bank is tipping interest rates to reach 2.60 per cent by the end of the year. Picture: NCA NewsWire / Emma Brasier.

Lowe said he remains convinced of a 2.50 per cent “neutral rate”, meaning it would neither stimulate nor hamper economic spending.

However, CBA senior economist Belinda Allen said the Bank believes the neutral rate is closer to 1.50 per cent and a terminal cash rate of 2.60 per cent would be contractionary.

This week, RBA Deputy Governor Michelle Bullock delivered a speech predicting the potential impact of a 300bp lift to the variable mortgage rate, reflecting changes already under way in the market and by the RBA.

Under that scenario, the RBA estimates just under 30 per cent of variable-rate borrowers would see their mortgage repayments increase by 40 per cent or more.

CBA experts say some households will have to ‘significantly’ cut spending to keep up with mortgages. Picture: NCA NewsWire / John Gass

It also predicts half of fixed rate borrowers would see their repayments increase by more than 40 per cent at the expiry of their fixed rate schedule, and 25 per cent of borrowers who switch around mid-2023 would see a $1000 or more increase in their monthly repayments.

“Those figures to us suggest that market pricing for the path of the cash rate is too high. We favour a shallower hiking cycle,” CBA experts said in a research update.

They said while the average borrower would be able to service their home loan, others, such as those who borrowed recently or at a higher leverage, will have to “significantly pull back on their spending”.

“A pull-back from these marginal borrowers is in our view enough to see the economy slow,” the research update said.

With interest rates set to continue to rise, Ms Bullock said the RBA will be closely monitoring how households respond to the combination of rising interest rates and cost of living pressures.