Commonwealth Bank warns interest rates will rise next year

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The nation’s biggest home lender is warning that interest rates will rise before the end of next year, joining two other major banks who are tipping the Reserve Bank to be forced to move earlier than it expects.

The Commonwealth Bank’s head of Australian economics, Gareth Aird, is forecasting the first move higher in the RBA’s cash rate in more than a decade to take place within 18 months.

“Our central scenario has the RBA delivering the first hike in the cash rate in November 2022,” he wrote in a note.

“We have pencilled in an increase of 15 basis points, which would take the cash rate to 0.25 per cent.

“We expect that to be followed by an increase of 25 basis points in December 2022. We have three further 25-basis-point hikes in Q1 23, Q2 23 and Q3 23 [the first, second and third quarters of 2023].”

But CBA’s forecast is not all bad news for borrowers who have taken advantage of current ultra-low interest rates to accrue large debts.

“That would take the cash rate to 1.25 per cent, the level at which we assess the cash rate to be neutral,” he added.

“Neutral” is where CBA now expects the official cash rate to sit if the economy is neither struggling nor booming, meaning interest rates might stay at that level for quite a while.

That would take the official interest rate back to where it was in June 2019, and slightly below where it was for the three years before that (1.5 per cent).

If passed on directly to variable mortgage rates, a 1.15-percentage-point rise in the cash rate would take the typical owner-occupier mortgage rate from 3.10 to 4.25 per cent and the average investor rate from 3.44 to 4.59 per cent.

On a $500,000 mortgage, that rate increase would result in a $324 per month increase in repayments.

Growing expectations of RBA rate rises

The Commonwealth Bank is the latest of the big four to shift its rate expectations forward over the past couple of weeks.

ANZ’s economists started the ball rolling with a forecast of the first rate rise in late 2023.

Following last week’s “stunning” jobs numbers, Westpac shifted its rate forecasts to pencil in a first rise by March 2023.

CBA is the first major local institution to shift rate rise expectations back into 2022, which would be exactly 12 years after the Reserve Bank last raised its cash rate target during the recovery following the global financial crisis.

Mr Aird does note that it being a forecast, he could be wrong either way.

“There are scenarios that could see the RBA pull the rate hike trigger earlier than November 2022, particularly if they tweak their reaction function because it becomes irrefutable that wages growth is on a path to 3 per cent per annum (the rate of growth they have targeted),” he argued.

“Alternatively, the RBA could delay hiking the cash rate if growth in labour supply was to accelerate quickly when the international border is reopened.”

Mr Aird recently published a research note highlighting how the loss of more than half a million temporary migrant workers, who are not counted in the monthly ABS jobs numbers, is likely to be contributing to the rapid decline in unemployment.

In its most recent communications, the RBA has generally maintained its outlook that the first interest rise is unlikely to come before “at least” 2024.

The Reserve Bank’s assistant governor (economic) Luci Ellis is speaking later today at a business function in Adelaide.

By business reporter Michael Janda (Original ABC Article)