Home buyers could face higher mortgage repayments as early as June as financial markets and economists warn a rapid run-up in inflation could force the Reserve Bank to lift official rates above 2 per cent within a year.
In a development that feeds into growing federal concerns about cost-of-living pressures ahead of an election due by May, the nation’s biggest lender, the Commonwealth Bank, said it believed the RBA would have to start increasing interest rates by the middle of the year.
Even a 1 per cent rise could add hundreds of dollars a month in repayments on the average new mortgage.
The official cash rate has been at a record low of 0.1 per cent since November 2020 as the Reserve attempted to cushion the economic blow of the COVID-19 recession. Last month, it ended its quantitative easing program while maintaining an interest rate rise this year was “plausible”.
The nation’s biggest lender is expecting official interest rates to start rising in June with a 15-basis point increase.
Gareth Aird, the Commonwealth Bank’s head of Australian economics, said the cash rate was likely to be at 1 per cent by the end of the year, reaching 1.25 per cent early next year. This would translate into an average variable mortgage rate of about 4.5 per cent.
Mr Aird said there were at least 1 million home buyers who had never experienced an interest rate rise.
“Interest rate increases will generate changes in behaviour, which in turn will impact economic outcomes,” he said.
A significant proportion of recent borrowers are also expected to see their fixed rate terms expiring over the next two years.
When considering the total monthly value of all home loans written, fixed rate mortgages peaked in July and August 2021 around 46 per cent as borrowers locked in record low rates. In July 2019, before the pandemic, the proportion of fixed rate loans was about 15 per cent.
A borrower with a $500,000 standard variable rate mortgage would see monthly repayments increase about $275 with a 1 per cent rate rise and about $560 with a 2 per cent jump in rates.
A home buyer with an $800,000 loan would see their monthly repayments cost $440 more with a 1 per cent increase and $900 with a 2 per cent rise.
Borrowers with variable mortgage rates would not be the only ones hit by a lift in the official cash rate. Mr Aird said there were about $500 billion worth of fixed rate mortgages due to expire over the next 24 months, putting those borrowers at risk of higher rates.
AMP chief economist Shane Oliver expects the RBA to raise the cash rate in August, but says this could “possibly” occur in June due to stronger inflation data, solid employment outcomes and the start of wage growth.
Over the next two years, he expects to see the interest rate peaking between 1.5 per cent and 2 per cent.
“This would add a similar amount to variable mortgage rates,” Dr Oliver said. “It will take household debt interest payments relative to income back to around 2018 levels.”
HSBC economists are now forecasting a half percentage point worth of rate rises in the second half of 2022 from August at the earliest with increases now “likely” rather than “plausible”.
Financial markets are even more aggressive, now pricing in a 1 per cent cash rate by October and a 2 per cent cash rate by May.
Consumers are also picking up inflation pressures. The ANZ-Roy Morgan weekly measure of consumer sentiment reveals a further lift in inflation expectations with respondents tipping it to reach 5 per cent.
Inflation, currently at 3.5 per cent, is a growing political problem for the federal government. This week, The Sydney Morning Herald and The Age revealed the government is debating the merits of extending the low and middle-income tax offset for another year as a $7 billion election sweetener.
But it is being warned such a tax cut could fuel a further rise in inflation, forcing the Reserve to move more quickly on interest rates or push them higher than expected.
Pressed on a 65 per cent increase in the price of beef since late 2013, Prime Minister Scott Morrison linked inflation pressures to the state of the budget.
“I am addressing what the pressures on inflation are in this country. And that goes to the cost of living. An important way to ensure that we can control those inflationary pressures is the financial management of the government,” he said.
Figures released to a Senate estimates hearing on Tuesday showed there was about $5.5 billion worth of government decisions taken in its mid-year budget update yet to be made public. They should be released over the next six weeks, ahead of the March 29 budget.
They don’t include $2.3 billion in extra spending the government has revealed in recent weeks, such as its $400 bonus payments to aged care workers.
At its mid-year update, the 2022-23 budget was forecast to show a deficit of $84.5 billion.
Shadow treasurer Jim Chalmers would not be drawn on whether Labor would support extending the low and middle-income tax offset, arguing cost-of-living pressures could be dealt with in other ways.
“We need to get wages growing again because real wages are going backwards. We’ve got a policy there. We have to think about the costs of living right across the board. Tax is an important part of the story, but it’s not the only part of the story,” he said.
Article Source: www.brisbanetimes.com.au
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