There are fears Wednesday’s massive jump in inflation could hit mortgage repayments, with the Reserve Bank of Australia now considering raising interest rates to combat rising costs.
After it was announced that the consumer price index (CPI) rose by 7.3 percent last year, banks and some experts believe that interest rates could be raised by at least 0.5 percent by the end of the year, and by as much as two meetings until 2023.
Three of the big four banks raised their inflation forecasts after the announcement, with the Commonwealth Bank (CBA), NAB and ANZ expecting to raise the cash rate by 25 basis points at the RBA’s November and December board meetings, taking the rate up to 3. 10 percent by the end of 2022.
“There’s no two ways about it – inflation is hot in Australia right now, as it is in many parts of the world, and we expect the RBA to respond by raising the cash rate again,” a CBA spokesman said.
“Indeed, our call was for the RBA to raise the rate one or two more times by 25bps and then pause for an extended period.”
ANZ said a single shock increase of 50 basis points was “possible” in November.
“But we think the RBA would prefer more frequent hikes than going back to 50bps, given the reason behind the decision to go to 25bps. in October,” said the press secretary.
A rise in the cash rate of just 0.25 per cent in November will see households pay $809 more a month on their mortgage than they did in April on a $500,000 home loan, according to Canstar.
For those with a $1 million mortgage, repayments would jump more than $1,619 for a 0.25 percent jump and $1,778 for a 0.5 percent increase.
The central bank has a more positive outlook for the cash rate, predicting it will peak at 3.10 per cent, while Westpac and NAB predict it will peak at 3.60 per cent in March 2023.
Meanwhile, ANZ predicts the cash rate will hit a terrifying 3.85 per cent in May 2023, which could mean repayments rise by more than $1,000 a month on all mortgages over $500,000 paid over 25 years .
RateCity research director Sally Tyndall warned families and mortgage holders amid speculation of a rate hike.
“It’s going to be a tough Christmas for many families, with two more rate hikes knocking on the door and inflation peaking,” she said.
“Inflation does not go down without a fight. The RBA will probably have to throw more firepower at him than he may have first thought.”
The RBA will continue to raise the cash rate as inflation remains “uncomfortably high”, said BIS Oxford Economics head of macroeconomic forecasting Sean Langkake, ruling out a rise above 0.5 percent.
“We continue to expect a further 50 basis point tightening before the RBA pauses to assess how the economy is tracking,” Mr Langkeik said.
“This is a very strong inflationary impact.
“However, this is broadly in line with the RBA’s expectations, meaning it will have a relatively limited impact on their outlook.”
Mortgage holders will have to contend with even higher payments in the coming months as inflation pushes up the cost of essentials.
More than three-quarters of September’s 1.8 percent rise in inflation came from a jump in commodity prices, with food alone up 3.2 percent last quarter and 9.0 percent a year ago.
Fruit and vegetable prices rose by 16.2 percent last year, dairy products by 12.1 percent, with prices expected to rise due to the effects of floods.
Household spending is rising, with the average person needing a pay rise of $6,637 this year just to keep up with inflation, according to Canstar financial expert Effie Zachos.
“Budgets will be further strained by cost-of-living pressures as inflation shows no signs of abating,” Ms Zachos said.
“Household savings and emergency buffers are likely to take a hit. The government forecasts that household savings will decline from elevated levels to 3.25 percent in the June 2024 quarter. The next 12-18 months will be a storm for households to weather.”