Bad prediction for interest rates

Australian homeowners have been warned to brace for more interest rate troubles as economists at a major bank make a big prediction.

Hot pay and spending data has convinced ANZ economists that next week’s interest rate hike will be much bigger than initially expected, with the lender now expecting the Reserve Bank adds 40 basis points instead of 25.

The Big Four Bank says Wednesday’s GDP figures hinted that runaway inflation will require a stronger hand from the RBA at next week’s board meeting, bumping the current target to more than double its current level of 0.35% for pile more pain on borrowers.

Last month, RBA Governor Philip Lowe kicked off a much-anticipated hiking cycle when he scrapped pandemic contingencies and raised cash rate target for first time in 12 years.

Commonwealth Bank economists expect another 25 basis points to be added to the cash rate target on Tuesday, while the market is pricing in 40 basis points, a figure that ANZ is now in line with.

If ANZ’s prediction comes to pass, it means the cash rate target will drop to 0.75% and potentially add another $111 to the monthly repayments of a $500,000 loan.

ANZ said on Thursday its shock forecast change was triggered by first-quarter GDP data which pointed to an even bigger inflation problem for Australia than previously thought.

The national accounts showed a relatively strong economic performance for the first three months of the year, with quarterly growth of 0.8% supported by a surge in spending that defied the impacts of Omicron, floods and war in Ukraine.

But ANZ said the data also contained worrying indicators more urgent action will be needed from the Reserve Bank to keep prices in check.

“While GDP was in line with our expectations, earnings data showed average hourly non-farm earnings increased by more than 5% over the past year,” ANZ wrote in a note.

“It’s well above our expectations just a few weeks ago and certainly much stronger than the wage price index signal.”

ANZ also noted that the broadest measure of consumer inflation – the household consumption deflator – recorded the largest quarterly increase since 1990.

“As such, we believe the strength of the price and wage measures in the GDP data should be sufficient to convince Governor Lowe that ‘there is a very strong case’ for deviating from a steady move. 25 basis points and get the cash rate a little bit higher a little bit faster,” ANZ wrote.

Commonwealth Bank chief economist Gareth Aird said he was sticking to a 25 basis point forecast as Wednesday’s data predated the RBA’s May rate hike and could not so not tell us much about the future.

“There are already signs that rising rates and the expectation of further hikes will cool the economy,” Aird wrote.

“And the optics of a more than 25 basis point increase in the cash rate in June could imply that the RBA board has changed its assessment of the outlook for inflation and / or inflation risks in depending on the change of government.

“That’s not a message we think the RBA would want to send. Indeed, we don’t think the Board will change its view on the inflation outlook because of a change in government.

Canstar’s analysis shows that a 25 basis point rise on Tuesday could add $69 to the monthly repayments of a $500,000 loan.

Combined with May’s rate hike, that’s $121 more per month.

If rates go up 40 basis points, that’s $111 more per month, or $163 in combination with last month’s hike.

People repaying a $1 million loan face a monthly repayment increase of $138 for a 25 basis point hike and $222 for a 40 basis point hike.

“Unfortunately, the first increase in repayments in 11 years is just a taste of what is to come and warns borrowers that now is the time to prepare financially as best they can,” said Steve Mickenbecker, Canstar financial expert.

“A projected cash rate of 2.5% in a few years adds $681 to the monthly repayments of a $500,000 loan.”

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