Interest rate rises: Home borrowers warned to brace for up to four rate hikes this year

Australian home borrowers are being told to brace for at least four rate hikes during the coming year with the Reserve Bank expecting inflation to remain a problem into 2028.

A mortgage holder with an average $694,000 home loan, under this scenario, could potentially pay $451 more a month on their mortgage in a year from now, adding up to $5412 a year in extra repayments.

With both headline and underlying inflation well above the RBA’s 2-3 per cent target band at the end of last year, former Treasury economist and Judo Bank chief economic adviser Warren Hogan said it was conceivable the RBA cash rate would have to be hiked to a 15-year high of 4.6 per cent by next year.

Persistent inflation could also see the RBA cash rate rise to 5.1 per cent for the first time since late 2008, which would imply six rate hikes to the existing 3.6 per cent level.

“Beyond that, it’s hard to tell. Hopefully, we don’t need to go to 5 per cent. Can’t be ruled out,” he told The Nightly.

In that more extreme scenario, monthly repayments on an average new loan would be $684 higher than they are now. That would leave them $8208 a year worse off as variable mortgage rates climbed above 7 per cent.

University of New South Wales economics professor Richard Holden forecasts up to three hikes this year, one more than financial markets expect.

“I’d say two to three: they’ll obviously need to see what it takes to knock inflation on its head,” he told The Nightly.

“They’re going to be reticent to do anything, so I don’t think it’s a done deal that they’ll raise rates next week. I obviously think they should.”

Professor Holden blamed inflation on the Reserve Bank cutting rates last year during a time of very low unemployment as part of a strategy of trying to maintain jobs growth.

“I think it’s been a failure and there were plenty of us who called it out from the start as being at best a very high stakes gamble,” he said. “It’s obviously failed and it’s now time for her (Governor Michele Bullock) to change course.”

When the RBA started cutting rates in February last year, Australia’s terminal cash rate of 4.35 per cent had been well below the peak post-COVID levels seen in the United States (5.5 per cent), the UK (5.25 per cent), Canada (5 per cent) and New Zealand (5.5 per cent).

Australia’s unemployment rate was at just 4.1 per cent in February and May last year, when the RBA cut interest rates for the first time since late 2020.

The jobless rate was at 4.3 per cent when it eased in August but in December, it fell back to 4.1 per cent, stirring fears of businesses passing on higher wage costs on to consumers.

Headline inflation soared to 3.8 per cent at the end of last year, up from 3.4 per cent in the year to November 30.

But when volatile items like soaring electricity, holiday accommodation and fresh food prices were taken out of the equation, underlying inflation last year climbed by 3.3 per cent.

The futures market now sees a February 3 rate hike as a 72 per cent chance.

The Reserve Bank expected both headline and underlying inflation to only fall to 2.6 per cent by December 2027, in its November statement on monetary policy.

That would imply inflation not returning to the mid-point of its 2-3 per cent target until 2028. An RBA update on Tuesday may show less confidence in controlling inflation.

Federal Government spending this financial year is expected to make up 27 per cent of the economy, adding to inflationary pressures.

The Commonwealth’s $786.6 billion in projected spending would also include cost blowouts on the NDIS but not extra state government spending on infrastructure projects like Melbourne’s Suburban Rail Loop, which is conservatively expected to cost $34.5 billion.

Australia’s big four banks are less worried about interest rate rises with the Commonwealth Bank, ANZ and Westpac now forecasting one RBA rate increase in February. NAB is the outlier in predicting rate rises in February and May.