Homeowners have been warned to brace for a double whammy of interest rate rises on Tuesday and again in August, with total monthly repayments expected to be driven at least $333 higher on the latest predictions.
Markets and economists are tipping a 50 basis point increase when the Reserve Bank meets on Tuesday, lifting the official cash rate from 0.85% to 1.35%, with further rises expected throughout 2022.
Australia is experiencing record low unemployment of just 3.9%, with the economy recovering strongly after Covid lockdowns, while global supply chain problems and energy prices are driving inflation, which could be as high as 7% by year’s end.
The RBA has responded by lifting the cash rate from the emergency levels of 0.1% set in November 2020, with a flurry of rate rises during election season in May, again in June and another expected on Tuesday.
According to interest rate comparison service RateCity, the May and June rises and a further 0.5% increase in July will lift the monthly repayments on a $500,000 loan by $333.
Households that have borrowed $750,000 will be paying $499 more a month, and a loan of $1m will cost $665 more a month.
If July’s rate rise is smaller than expected – for example, at 0.25% – the cumulative effect of the last three rate rises would be $264 for a $500,000 loan.
Ben Udy, an Australia and New Zealand-focused economist at Capital Economics, told Guardian Australia a rise of 50 basis points on Tuesday was “most likely” followed by another in August.
Udy said the current cycle of increases is “justified based on the strength of inflation” and because the labour market is “extraordinarily tight”.
Udy is then projecting smaller 25 point rises, taking the cash rate to 2.85% by the end of the year and 3.1% by February. “But inflation could peak at 8%. If that happens, the RBA could heighten the rate by 50 points for longer.
“They are looking to hike rates by a lot to show the RBA is serious about bringing down inflation.”
The treasurer, Jim Chalmers, has warned of “significantly higher” inflation this year.
But the RBA governor, Phil Lowe, has poured cold water on some estimates of the cash rate reaching 4% by the end of 2022, suggesting this was not “particularly likely” and would “slow the economy quite a lot”.
Westpac’s economics team has forecast the cash rate will increase to 2.35% by the end of this year and hit 2.60% by early 2023.
Stephen Koukoulas, the managing director of Market Economics, said the increase of 0.5% on Tuesday is “pretty much baked in” because the rate is coming off a low base, but a larger increase would be “a bit of a sledgehammer”.
The RBA will then be guided by global developments and the inflation outlook, including the June quarter inflation result out at the end of July, he said.
Koukoulas can already see “tentative signs” of inflation abating, including freight shipping rates down by 30% from highs in February, “wheat prices down despite the war in Ukraine”, and “even oil, although we’re paying $2.20 a litre for petrol, is not going up any more”.
“The global price of oil down is down 5 to 10%, and lettuces will grow back in the next few weeks, so we’re hopefully paying $3-$4, not $10 [for a lettuce].”
These “don’t mean we don’t have to keep hiking” interest rates through 2022, but “lower momentum” should see inflation decelerate in 2023, he said.
Koukoulas said a month ago he had tipped the cash rate to reach as high as 3.5% in this cycle, but has now scaled that back to 3%.
Udy said we are “already seeing an impact on the housing market”, with prices down in Sydney and Melbourne. “It will get worse before it gets better.”
RateCity’s research director, Sally Tindall, advised borrowers to “sit down and work out what a 2.5% interest rate increase would do to their monthly repayments” and consider options such as refinancing.
Koukoulas said although some households may be overextended, “at a macro level … financial stress is very low”.
“There clearly are people who borrowed at the top of the price cycle and bottom of the interest rate cycle, who perhaps will have to confront more challenging circumstances … but generally, because we have a strong level of employment at the moment it’s easier to make repayments, and most people will be able to.
“Rate rises may be annoying, but we can cope.”
