Why Australian home borrowers are facing more interest rate rises by Christmas because of inflation

Australian homeowners are expected to face four more interest rate rises by Christmas with inflation predicted to worsen this year.

Westpac also expects another increase in 2023 – the sixth rise in nine months as mortgage holders face the most severe shock since 1994.

A typical borrower with a $600,000 home loan faces a $671 surge in their monthly repayments by February next year compared with $1,118 for those on a $1 million mortgage.

The Reserve Bank of Australia on Tuesday raised the cash rate by half a percentage point, following on from May’s quarter of a percentage point increase.

This month’s 0.5 percentage point marked the biggest monthly cash rate increase since February 2000 and was also the first back-to-back rise since May 2010.

Westpac chief economist Bill Evans forecasts another large 0.5 percentage point increase in July.

Australian home borrowers are expected to face four more interest rate rises by Christmas with inflation expected to worsen this year

This would be followed by another 0.25 percentage point rise in August, after the Australian Bureau of Statistics released June quarter inflation data.

Mr Evans adjusted his forecasts to have the RBA also raising rates by a quarter of a percentage point in November, December, and again in February 2023.

This would take the cash rate to 2.35 per cent early next year for the first time since 2015.

Westpac previously forecast the cash rate hitting 2.25 per cent in May 2023 but now expects more aggressive rate increases. 

ANZ also expects the cash rate to hit 2.35 per cent, but in the middle of next year. 

Should Westpac and ANZ’s new predictions come true, that would be a 2.25 percentage point cash rate rise within a year – the fastest increase since August to December 1994 when the cash rate rose by 2.75 percentage points.

The latest time rates rose so sharply, inflation still doubled from 2 per cent in September 1994 to 4.5 per cent by June 1995.

In the year to March 2022, inflation surged by 5.1 per cent, the fastest pace in 21 years.

Allegra Spender, the independent member for Wentworth in Sydney’s east, wants an increase immigration to address inflation

The era of the record-low 0.1 per cent cash rate ended in May and rates are now at 0.85 per cent – the highest since October 2019 before the pandemic.

Mr Evans said by August, when the cash rate hit 1.6 per cent, there would be dangers in persisting with bigger interest rate rises of half a percentage point.

‘After that, the cash rate would have reached 1.6 per cent and that’s what I would call in that sort of neutral territory,’ he said.

‘That’s where it gets a bit more dangerous to have big rate hikes because you can be pushing the economy too hard once you’re over that neutral range.’

But Mr Evans said the larger 0.5 percentage point rate rise was warranted for June as a tight labour market and supply chain shocks fuelled inflation.

He argued inflation would stay high if consumers expected price pressures to continue, which would see sellers put up prices as workers demanded better wages. 

‘The Reserve Bank absolutely has a role to deal with the domestic part of the inflation that they can deal with with higher interest rates,’ Mr Evans said. 

‘They also need to contain inflationary expectations, they need economic agents to believe that the Reserve Bank is on the job, is targeting inflation.’

Allegra Spender, the independent MP for Wentworth in Sydney’s east, called for immigration to be ramped up to more arrivals than before Australia closed its border in March 2020.

The Reserve Bank of Australia on Tuesday raised the cash rate by half a percentage point, following on from May’s quarter of a percentage point increase

‘For the next two years, I’ve suggested that we increase total migration to 220,000,’ she told ABC Radio National on Thursday.

A net annual immigration intake of 220,000 would be higher than the 194,000 level of 2019-20, which included the first months of the pandemic.

Treasury, which favours high immigration, is forecasting a net annual intake of 235,000 by 2024.

Ms Spender, who represents Australia’s wealthiest electorate, argued higher immigration was needed to tackle inflation.

‘You just can’t do the work because you don’t have the skills,’ she said.

‘Every business I’m talking to is saying, “We’ve had our borders effectively closed for the last two years, we are desperately missing skilled migrants and we should have a temporary increase in the skilled migration for the next two years at least”.

Wages in the year to March grew by 2.4 per cent, less than half the pace of inflation, despite unemployment being at a 48-year low of 3.9 per cent in April. 

That suggests global supply chain problems rather than wages are responsible for inflation, until there is more evidence of pay levels going up across the economy.

Westpac chief economist Bill Evans is forecasting another large 0.5 percentage point increase in July.