Former RBA governor's bleak interest rate rise prediction
The Reserve Bank of Australia will meet this week to decide what the cash rate will be.
A former Reserve Bank of Australia (RBA) governor has made a grim prediction about where interest rates could go. It's been on hold at 4.35 per cent since November and homeowners have winced through 13 rate rises since May 2022.
A poll of more than 3,000 Yahoo Finance readers found 53 per cent of people are struggling with their mortgages and they're desperate for an interest rate drop, especially in a cost of living crisis. But Philip Lowe believes rates could go up due to inflation.
He told the Australian Financial Review the fight against inflation "isn't done" yet and the RBA might use an interest rate rise to push it down.
Are you struggling to keep up with your mortgage? Email stew.perrie@yahooinc.com
"I understand that most people hope the peak has been reached and it may well have, but it might not have," he said. "People have been asking me [about rates] through the course of the year and I've been reminding them there is still two-way risk."
The RBA will meet this week to decide what it will do with interest rates.
Consumer Price Index (CPI) data for the first quarter of 2024 revealed yearly inflation now sits at 3.6 per cent, which is still well above the RBA's 2-3 per cent target.
It's clear the hard work of reducing inflation is starting to pay off though as the 3.6 per cent annual CPI rate in the 12 months to March is lower than the 4.1 annual rate seen up to the December 2023 quarter, and far smaller than the peak 7.8 per cent rate in the December 2022 quarter.
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Big Four banks’ interest rate predictions
But the CPI data released last month saw major banks push back their forecasts for an interest rate drop.
Here's when the big four believe we'll see some mortgage relief, according to Rate City.
Commonwealth Bank (CBA): 0.25 per cent drop in November, then dropping to 3.10 per cent by December 2025
Westpac: 0.25 per cent drop in November, then dropping to 3.10 per cent by December 2025
NAB: 0.25 per cent drop in November, then dropping to 3.10 per cent by November 2025
ANZ: 0.25 per cent drop in November, then dropping to 3.60 per cent by June 2025
CBA originally suggested there could be three 0.25 percentage point cuts this year, with the first to come in September, but it is now only factoring in one because inflation isn't falling fast enough.
“The near‑term risk sits with an interest rate hike. But we expect the RBA to be on hold over the next six months given the economy is still contracting on a per capita basis, inflation is forecast to fall further, and the labour market is anticipated to loosen,” CBA’s head of Australian economics, Gareth Aird, said.
ANZ's boss Shane Elliott said the RBA might react to how Aussies use their stage 3 tax cuts when deciding on interest rates later in the year.
There could be 3 interest rate hikes
An interest rate rise will no doubt put households under pressure, but they could be in for a lot of pain if one forecaster is to be believed.
Judo Bank chief economic adviser Warren Hogan predicted there could be as many as three interest rate rises at the next few RBA meetings, bringing Australia closer to the rates set in New Zealand, the UK and the US.
“Everything points to the fact that 4.35 per cent isn’t the right level for the cash rate," he told the Australian Financial Review.
“The RBA’s strategy this cycle doesn’t seem to be working. They were hoping we could do less than the rest of the world because we were more exposed to the nominal channel of monetary policy through variable rate mortgages."
He reckons interest rates will head as high as 5.1 per cent to curtail inflation.
The government is focused on getting inflation lower
Labor has declared inflation the “primary focus” of this month’s federal budget, as the government walks the tightrope of lowering cost of living pressures while putting downward pressure on the bottom line.
Amid growing calls for spending cuts to take the heat off interest rates, and ahead of this week’s meeting of the Reserve Bank board, Finance Minister Katy Gallagher would not be drawn on what Labor’s budget tactics would be.
“[Inflation has] been a primary focus of our budget. And you’ll see that the investments we’re making are putting downward pressure on inflation," Finance Minister Katy Gallagher explained to the ABC.
“But at the same time, we need to get serious about the investments that we’re going to make to grow the economy as well.”
Leading economist Chris Richardson has warned the government to be careful of cash splashing in this year's budget.
"So inflation limits what the government can and will do in the budget," he wrote in his pre-budget analysis.
"That's likely to be a relatively binding constraint because it would be politically dumb to pour so much extra into the economy that the Reserve Bank of Australia had to raise rates."
- with AAP and NCA Newswire
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