Investment banks make chilling rates rise prediction with ‘aggressive’ strategy to persist

Several investment banks have warned that Australia’s interest rates have still not peaked and that multiple hikes will continue to happen in coming months.

Several investment banks have warned that Australia’s interest rates have still not peaked as inflation continues to run rampant.

Relief won’t be on the way for mortgage holders until after September, which is when the cash rate is expected to hit 4.85 per cent.

Given the current cash rate is sitting at 4.1 per cent, that means three more “aggressive” rate hikes are lurking on the horizon.

This week, three separate investment banks issued the sobering warning — TD Securities, Goldman Sachs and Capital Economics.

TD Securities previously held a more optimistic outlook, but added another 25 basis points to its forecast for Australia’s “terminal rate” off the back of some new economic data.

Despite a looming recession, Australia’s labour market data has remained stubbornly strong, according to data released last week, meaning more rate rises may be necessary.

The Reserve Bank of Australia has hiked interest rates in an “aggressive” tightening cycle in the past year. Photographer: Brendon Thorne/Bloomberg

TD Securities senior strategist Prashant Newnaha said, per The Australian, “The red hot Australian labour market poses the threat that inflation expectations become unanchored given weak productivity and upside risks to the RBA’s wages forecasts.”

Data from the Australian Bureau of Statistics, released last Thursday, found that even with many companies collapsing or laying off staff, the number of unemployed people in Australia actually shrank.

The jobless rate in May was 3.6 per cent, down from 3.7 per cent in April.

This means that in the 31 days since the figure was last measured, an additional 76,000 Australians found jobs.

Federal Treasurer Jim Chalmers said the May figures were “a remarkable achievement” but added “we still expect unemployment to tick up over time”.

That, coupled with the Fair Work Commission increasing the minimum wage last month, has made more rate rises all but inevitable, Mr Newnaha said.

Australia’s central bank is apparently concerned the bump to the minimum wage will embolden other workers for a pay rise.

Homeowners should brace for more mortgage pain. Picture: NCA Newswire / Gaye Gerard

Mr Newnaha added that although it seemed “aggressive” to hike rates by 25 basis points each month, this would prove a necessary evil.

“The bank considered hiking (by) 25 basis points at each meeting to be consistent with the bank achieving its inflation target by end 2024,” Mr Newnaha noted.

“As aggressive as the forecast paths in the scenario analysis were, there have been a few significant shifts in assumptions since then that suggest the bank would likely consider a cash rate above five per cent in a re­freshed scenario analysis.”

Earlier this month, Australia’s central bank hiked up interest rates by 25 basis points, bringing the cash rate to a whopping 4.1 per cent.

That’s a significant jump from the historic pandemic low of 0.1 per cent that Australians enjoyed for more than two years during the Covid-19 pandemic.

This marks the 12th time the bank has hiked rates since May last year and is the highest the cash rate has been for the past 11 years.