Bank tips extra mortgage pain for Christmas

ANZ is now predicting that interest rates will rise above three per cent this year, more than 12 months earlier than previously forecast.

The bank is predicting four successive 50 basis point rate hikes in August, September, October and November – a full 200 basis points of tightening that’ll see the cash rate hit 3.35 per cent by November.

The Reserve Bank of Australia might also opt to hike rates by more than 50 basis points at one of those meetings, although that wouldn’t imply a higher terminal rate, ANZ head of Australian economics David Plank wrote.

“At this stage our thinking is that the cash rate will need to remain at this restrictive setting for an extended period, given persistence in core inflationary pressures,” he forecast.

ANZ’s prediction is based on the strong momentum in the labour market, with last week’s monthly jobs report considered the best in nearly five decades.

ANZ’s forecast is most hawkish forecast of the big four banks, with the others predicting rates to peak at 2.6 per cent by early next year.

But the interest rate markets agree with ANZ, predicting a 3.3 per cent rate hike by the end of 2022.

They also give a 79 per cent chance that rates will rise to 2.0 per cent at the next RBA meeting, which would require a 65 basis point hike.

Minutes from the Reserve Bank’s last meeting on July 6 indicated board members said the cash rate needed to rise, but don’t have a good idea how much it will take to stop stimulating the economy.

The board discussed a “neutral real interest rate for Australia”, a policy rate that’s neither expansionary nor contractionary, but “members noted that gauging the level of the neutral rate is challenging in practice”.

There are different methods for estimating the neutral rate and the range of estimates is wide, board members said, according to the minutes released on Tuesday.

Still it’s clear the cash rate, currently 1.35 per cent after a 50 basis-point hike on July 6, is “well below the lower range of estimates for the nominal neutral rate.

“This suggests that further increases in interest rates will be needed to return inflation to the target over time,” the minutes say.

J.P. Morgan analyst Tom Kennedy said the minutes contained “no major surprises” and the investment bank continues to expect another 50 basis point hike at the RBA’s next meeting.

“But given last week’s blockbuster labour data and the high likelihood of another strong inflation print next week it’s clear the probability of a super-sized move has increased,” Kennedy added in a note.

-with AAP