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Interest rates: RBA analysis suggests mortgages could rise by 60 per cent

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Back in October of last year, I explored the possibility that The Reserve Bank of Australia (RBA) may be forced to raise interest rates in order to chase rising inflation.

Comparing them to the old Looney Tunes character Wile E. Coyote, I suggested that the RBA could be made to chase inflation as fiercely as Wile E. chased the Road Runner.

Now how oversized the rate is rising 0.5 percent will apparently become commonplace and forecasts peak at The current rate of the RBA continues to be revised upwardshe appears to be following the lead of Wile E. Coyote, rushing toward his inflation goal after falling too far behind.

on tuesday ANZ has revised its target cash rate for the end of this year to 3.35 per cent, now the highest of the big four banks. To reach this level, the bank predicts that the RBA will raise rates by 0.5 percent in August, September, October and November.

While this may be seen by some as excessive, when placed in the context of the current strength of the Australian economy and interest rates in key Western countries rising even faster, it is easy to see how things could potentially play out this way.

Last week, the Bank of Canada surprised the world by raising interest rates by as much as 1 percent at a single rate meeting. Meanwhile in the US, the Federal Reserve is said to raise rates by 0.75 percent next week and will continue to raise rates aggressively in the coming months.

The mandate of the RBA

The official mandate of Art RBA is to “contribute to currency stability, full employment and the economic prosperity and well-being of the Australian people”.

While this can be a little boring, it often comes down to two things – inflation in the 2 to 3 percent target range and the pursuit of low unemployment.

First, the RBA has failed quite badly. If the Treasury’s and the RBA’s own forecasts of inflation reaching 7 per cent or more are correct, it would mark the highest level of inflation in Australia since the RBA set its inflation target nearly 30 years ago.

On the other hand, the nation’s unemployment rate currently stands at just 3.5 percent, the lowest level since comparative records began nearly 50 years ago. But linking it to the RBA and monetary policy will be stretching it quite a bit.

If the working-age population continued to grow at the same rate as before the pandemic, the unemployment rate would be around 5.5 percent, higher than at the start of the pandemic, according to an analysis by IFM Investors economist Alex Joyner.

I look forward to it

Looking at a simplistic view of the RBA’s powers, it’s clear what’s coming next: interest rate hikes and more. With inflation set to rise even higher and the risk that it could become entrenched in the domestic economy, the RBA is set to raise rates aggressively in an attempt to contain inflation before it is too late.

This is where things start to get tricky for some mortgage lenders.

With inflation in Australia still nowhere near its expected peak and the labor market extremely strong, rates could continue to rise for the foreseeable future and remain well above pre-pandemic levels potentially for years to come.

According to recent analysis by the RBA, around 30 per cent of variable-rate mortgage holders face a mortgage payment increase of more than 40 per cent if the cash rate hits 3.1 per cent. (It is currently 1.35 percent.)

The RBA’s analysis of fixed-rate borrowers at a forward cash rate of 3.1 per cent raised further concerns. More than 50 percent of fixed-rate borrowers face mortgage payments rising by 40 percent or more, with about 10 percent expecting their payments to rise by 60 percent or more.

A double-edged sword

Given how long it is taking inflation of around 7 per cent to fall to the RBA’s target of 2-3 per cent, this is very good and bad news, at least for mortgage lenders.

The good news is that the labor market is strong, and even with the storm brewing on the global economic horizon, on paper Australian jobs are better equipped than they have been in almost 50 years to deal with any challenge that may arise. will arise on our way.

The bad news is that the longer the labor market remains strong, the higher rates could be as the RBA doubles down on its attempts to reduce aggregate demand in the fight against high inflation.

Then there is the issue of falling house prices. House prices could fall by up to 31 per cent if the RBA’s cash rate peaks at 4.25 per cent, according to analysis by fund management firm Coolabah Capital. In this scenario, the cash rate would rise to 4.25 percent in 2023, followed by a two-year rate cut to 3.75 percent by the end of 2025.

For now though, the RBA will continue to chase high inflation like Wile E. Coyote chased the Road Runner. It may take quite some time to finally catch up, but with a job market this strong, he has plenty of ammunition to pursue it as aggressively as he wants.

Tarik Brooker is a freelance journalist and social commentator @AvidCommentator

Originally published as Worrying RBA analysis shows some mortgages are increasing by 60 per cent

https://www.heraldsun.com.au/business/economy/worrying-rba-analysis-shows-some-mortgages-increase-by-60-per-cent/news-story/ce8920544e0ca282f6401799b96fec6e

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