How High Will Interest Ratest Go?
#1 Global supply bottlenecks are easing and this will take pressure off inflation.
#2 Don’t read too much into what the RBA is saying. Some have interpreted the RBA’s recent comments – describing households as a whole as being in a “fairly good position” to withstand higher interest rates based on scenarios involving a 3% rise in interest rates. While the RBA has to sound tough to keep inflation expectations down, there is a danger in reading too much into its commentary regarding the path for interest rates.
#3 Medium term Australian inflation expectations remain reasonably low.
#4 Many households will see significant mortgage stress with a 3% or more rise in interest rates. a new borrower with an average $600,000 mortgage will have seen around a $600 a month increase in their monthly repayment since April. That is roughly an extra $7000 a year. Taking the cash rate to 3.1% would imply an extra $12,300 a year since April in mortgage payments. This is a huge hit to the household budget and spending power.
Five reasons why the RBA cash rate is likely to peak (or should peak) with a 2 in front of it rather than a 3 (or more)
Key points
- The RBA has hiked the cash rate by another 0.5% taking it to 1.85% and signalling more hikes ahead.
- We see the cash rate peaking around 2.6%.
- Market & consensus expectations for rates to rise above 3% are too hawkish, too aggressive
Getting inflation back under control is critical as a rerun of the 1970s experience of high inflation will be disastrous for Australians, the economy and investment markets. So the RBA is right to sound tough and act aggressively now.
# 5 It looks like the RBA is getting traction in slowing demand – far earlier than normal.
Concluding comment
For these reasons, our assessment remains that the RBA won’t need to raise the cash rate above 3% and that the peak will be around 2.6% either later this year or early next. By late next year rates are likely to be falling. This implies a slowing in the pace of rate hikes ahead which should help head off worst case scenarios for the property market and the economy
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