Expect no end to rate hikes, economists warn

Homeowners should prepare for the full pain of a 50 basis point hike on Tuesday, with more to come.

Auction rates are dropping as the market braces for a rise in rates. Picture: Darren Leigh Roberts

Homeowners should prepare for the full pain of a 50-basis-point hike in official interest rates on Tuesday, with analysts saying it’s all but certain banks will pass on the entire increase to borrowers.

Sally Tindall, research director at independent financial comparison website RateCity, said Australians knew the interest-rate cycle had turned, as the Reserve Bank had made no secret of its determination to bring inflation back within the target range of 2-3 per cent.

“What they didn’t know was how big and how fast the rate increases would be,” she said. “So this is a bold move and will come as a shock to many people.”

The RBA lowered the cash rate to an emergency level of 0.1 per cent to throw a lifeline to an economy battered by Covid-19 lockdowns.

The outlook changed earlier this year when inflation started to surge, leading the RBA to announce a 25bp hike in the cash rate at its May meeting – the first increase since November 2010.

The expected 50bp adjustment on Tuesday – added to a similar, jumbo-sized move at the June meeting – would take the cash rate to 1.35 per cent.

A 125-basis-point rate hike, albeit spread across three monthly RBA board meetings starting in May, would be the steepest increase since 1994. In that year, there were two consecutive rises, each weighing in at a full percentage point.

Independent financial website Canstar said household budgets would leak an extra $351 a month, assuming a 125bp jump in the cost of a 30-year variable-rate loan of $500,000.

The pressure on households will not end there.

RBA governor Philip Lowe has forecast that inflation will hit 7 per cent by the end of the year, and the cash rate was likely to increase to 2.5 per cent.

The housing boom has already emerged as an early casualty.

CoreLogic data on Friday showed a further acceleration in the property downturn in June, with national dwelling prices falling 0.6 per cent for their second consecutive monthly decline.

AMP head of investment strategy and chief economist Shane Oliver attributed the trend to affordability pressures, rising variable and fixed interest rates and poor buyer confidence.

Dr Oliver said he had now lifted his forecast for the peak-to-trough fall in house prices from 10-15 per cent to 15-20 per cent.

“It’s now quite likely rising rates will reverse a lot of the surge in prices that has occurred since 2020 on the back of record low mortgage rates in several cities, including Sydney and Melbourne,” he said. “House prices are falling after a massive boom, but it will soon start to weigh on spending and put a brake on how much the RBA can and will need to raise rates.”

Westpac chief economist Bill Evans, who has predicted a 50bp hike on Tuesday and a peak cash rate of 2.6 per cent in February next year, said headline inflation was well above the RBA’s target band.

The labour market was also the tightest it had been in 50 years and wages growth was accelerating, even if from modest levels.

“In this environment, official interest rates need to promptly move back towards neutral levels, followed by a measured shift into contractionary territory,” Mr Evans said.

Westpac, he said, expected the cash rate to rise to 1.85 per cent after the RBA’s August meeting.