‘Restrictive setting’: ANZ predicts RBA will raise cash rate to 3 per cent before Christmas

ANZ has dramatically revised its interest rate forecast to warn of four more massive rate hikes by the RBA before the end of the year.

Australian borrowers are facing four more massive rate hikes over the next four months that will take the official cash rate above 3 per cent before Christmas, ANZ warns.

The bank on Tuesday dramatically revised its predictions, saying “strong momentum in the labour market and the clear upside risks to inflation” would force the Reserve Bank to move to a “restrictive setting” by late 2022, “more than 12 months earlier than our previous forecast”.

“Our expectation is that the RBA will deliver this via four more successive 50 basis point rate hikes in August, September, October and November,” ANZ head of Australian economics David Plank wrote. “This 200 basis points of additional tightening sees the cash rate target at 3.35 per cent by November.”

This would “bring forward the point at which the economy slows below trend” and “also suggests house prices will fall by more than the 15 per cent or so we currently anticipate to the end of 2023”.

“But it doesn’t necessarily mean a hard landing for the economy,” he added.

“A cash rate of 3.35 per cent implies that household interest payments as a percentage of household income peak below the level reached in 2008.”

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Unemployment fell to a 48-year low in June. Picture: David Crosling/NCA NewsWire

Christopher Joye of Coolabah Capital has argued the RBA’s first rate hike in May “broke the Aussie housing market”.

“There is a striking structural change in the pace of house price declines that coincides almost exactly with the RBA lifting its cash rate by 25 basis points in May,” he wrote over the weekend.

“Following the super-strong jobs data during the week, the RBA is now all but certain to hike rates by 50 basis point for an unprecedented third consecutive month in a row in August. This will mean that variable-rate mortgage costs will have increased by a seemingly incomprehensible 175 basis points (or 1.75 percentage points) in just three months (or over four RBA meetings).”

Stunning jobs data released last week showed unemployment fell to a nearly 50-year low of 3.5 per cent in June, the lowest since August 1974, raising the prospect of faster and more aggressive rate hikes.

“We don’t think the RBA will be comfortable with policy merely getting to neutral by year-end given this backdrop,” Mr Plank said.

The RBA has already delivered back-to-back 50 basis point increases in June and July, following a 25 basis point rise in May – the first since 2010.

“There is a significant chance the RBA could opt to move by more than 50 basis points at one or more of its upcoming meetings (75 basis points, say, or even 65 basis points to ‘round’ the cash rate target to the nearest 0.25 per cent),” Mr Plank said.

“We would view this as a bring forward rather than implying a higher terminal rate. At this stage our thinking is that the cash rate will need to remain at this restrictive setting for an extended period, given persistence in core inflationary pressures. But we are conscious the downside risks to the economic outlook will increase with such a rapid move to a restrictive setting.”

Consumer prices rose 5.1 per cent in the March quarter, the fastest pace in two decades.

June quarter inflation figures, due to be released next Wednesday, July 27, are expected to show another sharp increase.

ANZ has revised its cash rate forecast. Picture: Naomi Jellicoe/NCA NewsWire

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ANZ’s call is significantly higher than its peers, which are already warning of serious pain on the horizon for households.

Last week, CommBank revised its own forecasts to two 50 basis point increases in August and September, followed by one further 25 basis point rise in November, which would bring the cash rate to 2.6 per cent.

“This would represent an incredible pace of tightening, particularly given the starting point was a cash rate of just 0.10 per cent and household debt sits at a record high as a share of income (Australia has one of the most indebted household sectors in the world),” CommBank head of Australian economics Gareth Aird wrote.

“The impact on households with a mortgage will be very significant given the percentage change in the mortgage rate will be incredibly large.”

Mr Aird noted that the majority of borrowers were on variable loans and would see their repayments “go up very quickly”.

Those on fixed loans would “be insulated, at least initially”, but were facing a massive pain come next year.

“Fixed rate borrowers will be rolling off an average fixed rate mortgage of around 2.25 per cent onto a rate around 4.5-5 per cent in 2023 based on our forecast profile for the cash rate,” he wrote.

“This will result in a very big step change in the interest cost on debt (for context, mathematically moving from a mortgage rate of 8 per cent to 16 per cent is the same as 2.25 per cent to 4.5 per cent in terms of what happens to the interest cost on debt — it doubles).”

Westpac also sees the cash rate reaching 2.6 per cent by early next year.

The bank is predicting a 50 basis point increase in August, followed by 25 basis points in September.

“The rate hike we had previously expected in December has been moved ahead to September,” Westpac chief economic Bill Evans wrote.

May’s rate hike ‘broke the housing market’, one expert says.

“That is consistent with our view that by December the evidence will be convincing that the Australian economy is slowing under the weight of a cash rate of 2.35 per cent (following the expected 25 basis point move in November), which is firmly in contractionary territory. We have also not changed the timing of the final rate hike in the cycle – a 25 basis point increase at the February 2 board meeting.”

NAB, meanwhile, expects the cash rate to reach 2.6 per cent, with a 50 basis point increase in August followed by 25 basis points each in September, November and February.

“We have further front-loaded our rate track, and now see the cash rate target at 2.35 per cent by November (was 2.1 per cent) and peaking at 2.6 per cent in February (previously mid-2023),” NAB economists wrote last week.

Interest rate increases have already caused the “sharpest slowdown in more than 30 years”, according to PropTrack’s June report, which showed national home prices fell 0.25 per cent last month.

That was led by continued falls in Sydney, down 0.4 per cent, and Melbourne, down 0.61 per cent.

Nationally, prices are still up 34 per cent since March 2020.

“While prices are down only 0.55 per cent from their peak in March 2022, an outsized rate hike in early June and expectations of much higher rates later in the year continues to slow all markets, with widespread falls seen in June,” the report said.

Last week, auctioneer and real estate industry coach Tom Panos urged the RBA to consider the impact of its rate hikes on the market, saying he was “really stressed” after “almost no buyers” showed up to his auctions.

“People have turned around and thought to themselves, man this is getting really scary out there as a buyer – I think there is definitely some of that,” he said in a video.

“So here’s the deal. If the Reserve Bank wanted evidence – because they keep saying in their commentary, we are looking at what our policies of interest rate rises are doing to property – if they really want to look, take it from someone who is there at the frontline, take it from someone who is seeing it right there in the heat of the moment, it has already had an impact.”

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