A major bank warned of a “risk” when it comes to interest rate hikes, which could send house prices plummeting and create a “ripple effect” through the economy.
The homeowners’ nightmare will continue into next week as the Commonwealth Bank forecasts a major hike in interest rates after its first hike in May after 11 years.
The economists of the major banks have forecast an interest rate rise of 0.25 percent, rising to 0.6 percent.
However, they warned that there was a “risk” of a larger 0.4 percent increase, estimating a 25 percent chance.
The Commonwealth Bank also ruled out any chance of interest rates remaining unchanged at 0.35 percent after the Reserve Bank raised it by 0.25 percent in May.
But good news for homeowners: The Big Four Bank rejected the possibility of a 0.5 percent hike in June.
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Commonwealth Bank economists said three things will influence the Reserve Bank’s decision in June, including wage data, the unemployment rate and first-quarter GDP data, pointing to an even bigger inflation problem for Australia than previously thought.
But while wage growth is accelerating across the economy and some people are receiving large wage increases, there is no broad wage pressure, they noted.
“Real wage growth is very negative indeed,” she added, with wages increasing only 0.7 percent in the first quarter of the year and 2.4 percent a year.
“The RBA is not facing a wage-price spiral as is observed in some other jurisdictions.”
In other words, the RBA doesn’t have to race against wage growth by aggressively raising cash interest rates. Indeed, the RBA wants wage growth to continue to rise.
“The central bank would like to see wage growth and wage expectations reset to above 3 percent a year, preferably to 3.5 percent. We are a long way from those levels at the moment,” she added.
Wage growth was also lower compared to other times when interest rates were raised, it noted.
The unemployment rate of 3.9 percent wasn’t unexpected either, supporting a 0.25 percent rate hike, their analysis said, and while soaring inflation suggested the RBA was “behind the curve” and the lack of wage growth is still a point of concern. care.
The change of government with the Labor Party now in power also supported the more modest 0.25 percent increase, the economists said.
“The view of delivering a cash rate hike of more than 25 basis points in June could imply that the RBA council has changed its assessment of the outlook for inflation and/or inflation risk based on the change of government,” they said. .
“That’s not a message we think the RBA would want to send.”
However, Commonwealth Bank economists warned that a 0.4 percent hike would make sense as it would bring interest rates back to normal levels after emergency measures were taken during the pandemic.
But they warned it could be a disaster for homeowners, as it “risks creating undue fear in a household sector where consumer confidence is fragile,” they explained.
“Consumer confidence has indeed been low at the start of an RBA tightening cycle — it is currently well below average levels, while confidence has been well above average at the start of previous rate hike cycles,” they said.
“Many households that borrowed money during the pandemic took the RBA’s outlook at face value “at least 2024 at the earliest” and did not expect a rate hike for at least another 18 months.
“These households may feel very uncertain about the future if, after a 25 basis point ‘business as usual’ increase in May that they had not anticipated, the next meeting were to announce a larger ‘business not as usual’ increase. to give. †
House prices also matter for the economic outlook, the economists said, as changes affect wealth, consumer confidence, spending and employment decisions.
“House prices fell in May. It was the first time that price declines had occurred at the beginning of a tightening cycle,” they explained.
“The monthly pace of house price declines will accelerate from here. While the RBA doesn’t focus on house prices, they are well aware of the links between house prices, sentiment, spending and financial stability.
“If interest rates are pushed too high too quickly, there is a risk that house prices will correct sharply lower in the short term, which would have a ripple effect through the economy.
“A much better result is housing prices being adjusted lower in an orderly fashion, which would be less of a problem for the broader economy.”
According to the Commonwealth Bank, interest rates could reach 1.35 percent by the end of 2022 and 1.6 percent by early 2023, which predicted the RBA will pause the increases “as the large schedule of fixed-rate home loan maturation allows for further natural tightening.” cares”.
Meanwhile, overheated wage and spending data has convinced ANZ economists that next week’s rate hike will be much stronger than initially forecast, with the lender now expecting the Reserve Bank to increase it by 0.4 percent instead of 0.25. per cent.
If ANZ’s forecast comes true, it means the target cash interest rate will rise to 0.75 percent, potentially adding another $111 to monthly repayments on a $500,000 loan.
People who repay a $1 million loan face a monthly repayment increase of $138 for a 0.25 percent increase and $222 for a 0.4 percent jump.