Toowoomba City: Keep an Eye on This Investment Destination in Queensland
03.11.2023
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One of Australia's biggest banks expects the fastest ever rise in interest rates, although the Reserve Bank of Australia believes most households can cope – even if rates increase by a massive three percentage points this year.
ANZ economists are now forecasting that the RBA will aggressively lift the cash rate to 3.35% by November, delivering an unprecedented six double interest rate hikes in a row.
While economists at the other big banks believe the cash rate will peak at 2.6% in coming months, the ANZ team do not think the RBA will be content with that level.
ANZ head of Australian economics David Plank said they expect the cash rate to move to a restrictive setting above 3% by late 2022, more than 12 months earlier than their previous forecast.
"This reflects the strong momentum in the labour market and the clear upside risks to inflation," Mr Plank said.
"We don't think the RBA will be comfortable with policy merely getting to neutral by year-end given this backdrop."
ANZ believes the RBA will deliver four more successive 50 basis point rate hikes in August, September, October and November, taking the cash rate to 3.35%, adding to the back-to-back supersized rises in June and July.
"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," Mr Plank said.
"But we are conscious the downside risks to the economic outlook will increase with such a rapid move to a restrictive setting."
RBA deputy governor Michele Bullock said interest rate rises will impact people at a time when inflation is increasing the cost of living, saying some households will find the hikes impacting their debt servicing burden and cash flow.
"It will impact people. It'll impact cash flows. To the extent that housing prices start to decline a bit it will effect people's feeling of wealth and that sometimes impacts as well," Ms Bullock said.
But Ms Bullock said households, in aggregate, are well positioned to deal with rising rates.
"On balance, I would conclude that as a whole households are in a fairly good position," she told an ESA Queensland function.
"The sector as a whole has large liquidity buffers, most households have substantial equity in their housing assets, and lending standards in recent years have been more prudent and have built in larger buffers for interest rate increases.
"Much of the debt is held by high-income households that have the ability to service their debt and many borrowers are already making repayments well above what is required.
"Furthermore, those on very low fixed-rate loans have some time to prepare themselves for higher rates."
She said given higher income households can devote a higher share of their incomes to debt servicing, a large number of households are "likely to be able to handle somewhat higher interest rates".
The RBA conducted analysis of the potential impact of a rise in variable mortgage rates of around 300 basis points, in line with recent financial market pricing.
Ms Bullock said the data suggested that over one-third of variable-rate borrowers have already been making average monthly loan payments sufficient to meet the resulting rise in repayments.
"In other words, there is limited impact on these borrowers.
"On the other hand, just under 30% of borrowers would face relatively large repayment increases of more than 40% of their current payments."
She said borrowers with fixed-rate loans due to expire by the end of 2023 would experience a median increase of around $650 (or 45%) in their monthly repayments, slightly more than the rise those on variable rates would experience.
Should the cash rate reach 3.35% by November as ANZ predicts, that would represent 325 basis points of hikes since May - the fastest tightening cycle since the RBA began announcing its desired level for the cash rate in January 1990.
Mr Plank said a faster move to a restrictive rate setting of 3.35% suggests house prices will fall by more than the 15% or so ANZ currently forecasts to the end of 2023.
"But it doesn't necessarily mean a hard landing for the economy," he added.
"A cash rate of 3.35% implies that household interest payments as a percentage of household income peak below the level reached in 2008."
Ms Bullock said the RBA board will closely watch how households respond to the combination of rising interest rates and prices as it decides how high and fast to raise the cash rate.
Source: realestate.com.au
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