Westpac raises interest rate forecast

One of the big four banks has raised its expectations for Australia’s interest rate hikes, which spells bad news for many mortgage holders.

One of Australia’s Big Four banks has revised up its expectations for Australia’s interest rate in the coming months, suggesting higher mortgage payments for already struggling households.

Westpac chief economist Bill Evans now expects the terminal interest rate to settle at 2.6%, up from his previous forecast of 2.37%.

It comes from a record low rate of 0.1% – introduced to help the country deal with the pandemic – which has since been increased to 0.85%.

Earlier this month, Reserve Bank of Australia (RBA) Governor Philip Lowe signaled that he expected the rate to reach around 2.5%, with more moves expected in the coming months.

“The resilience of the economy and higher inflation means that this extraordinary support is no longer needed,” Lowe said.

“The board looks forward to taking further steps in the process of normalizing monetary conditions in Australia in the coming months.”

The ANZ also expects significant rate hikes in the coming months, taking into account Lowe’s “hawkish rhetoric” that supports a 50 basis points (bps) hike in July and a likely interest rate hike each month through November.

More than half of Australian mortgages are on floating rate terms and many more are expected to be when their fixed rate loans mature by the end of 2023.

“Effectively 90 percent of mortgage borrowers are directly exposed to movements in the RBA cash rate over the next year and a half,” Evans said.

Westpac’s new position on the local exchange rate follows a revised forecast that sees a series of aggressive rate hikes in the US reaching 3.375%.

“This cycle for the remainder of 2022 will imply increases of 75 bps in July, 50 bps in September, 25 bps in November and 25 bps in December,” Evans said.

“This shift to higher global rates has also prompted us to increase our terminal rate for the RBA tightening cycle.”

He added that the more aggressive approach is likely to cripple the US economy, with the risk of a mild recession in the second half of 2023, followed by an interest rate drop to 2.125% by 2024.

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