Australia could have the world’s highest interest rates within a year, a financial expert fears – a move that would cause typical monthly loan repayments to surge by $700 come July 2023.
Reserve Bank of Australia Governor Philip Lowe on Friday warned corporate expectations of higher prices were likely due to fuel inflation – leading to multiple interest rate rises.
‘If that shift were to occur, inflation would be higher and it would be more persistent and we’d have to respond to that in time,’ he told the Banking 2022 Conference in Sydney.
Australia within a year could soon have the rich world’s highest interest rates – causing typical monthly loan repayments to surge by $700 by August 2023. Reserve Bank of Australia Governor Philip Lowe on Friday warned consumer expectations of higher prices were likely to fuel inflation – leading to multiple interest rate rises (pictured are pedestrians on Sydney’s Pitt Street)
Reserve Bank of Australia Governor Philip Lowe said a shift in ‘inflation psychology’ could see firms put up their prices
‘We’re watching very carefully for any shift in the inflation psychology.’
That shift could see demands for higher wages as companies increased their prices, leading to an inflation spiral.
‘For many years, firms were reluctant to put up their prices; because they didn’t want to put up their prices they didn’t want to put up wages,’ Dr Lowe said.
‘It’s quite possible that a period of protracted headline inflation will see this psychology shift and firms will decide that they have to put up their prices and if their prices are rising, then they can afford to pay higher wages.’
Dr Lowe again said it was ‘plausible’ the cash rate, now at a record-low of 0.1 per cent, could be increased in 2022 instead of 2024 ‘at the earliest’ as repeatedly promised last year.
Now, financial markets are expecting the Reserve Bank cash rate to climb to 2.25 per cent by July 2023, as rates were raised nine times.
Under this scenario, Australia and New Zealand would equally have the rich world’s highest interest rates, that were above the lending rates in the US, UK, European Union and Japan.
MB Super chief strategist David Llewellyn-Smith said: ‘According to markets, Australia is headed for the highest cash rate in the developed world with a bullet.’
Now, financial markets are expecting the Reserve Bank cash rate to climb to 2.25 per cent by July 2023, as rates were raised nine times. Under this scenario, Australia and New Zealand would have the rich world’s highest interest rates, that were above the lending rates in the US, UK and European Union
The Commonwealth Bank, Australia’s biggest home lender, is expecting interest rates to rise in June 2022 for the first time since November 2010.
Should variable rates rise in line with Reserve Bank moves, as financial markets are predicting, a borrower paying off a typical Australian home would owe $700 extra a month in repayments by July 2023.
In February, Australia’s median property price stood at $728,034, CoreLogic data showed.
With a 20 per cent deposit, a borrower owing $582,427 is now paying $2,269 every month to the bank on a 2.39 per cent variable loan rate. A 2.15 percentage point increase in mortgage rates would see those repayments climb to $2,965.
Australia’s headline inflation rate of 3.5 per cent last year was above the Reserve Bank’s 2 to 3 per cent target.
Those figures were taken before Russia’s invasion of Ukraine sparked sanctions and pushed West Texas crude oil prices to $US130 a barrel for the first time since 2008.
National average unleaded petrol prices last week rose to a record 183.9 cents a liter and could surpass the $2 a liter barrier, Australian Institute of Petroleum data showed.
A 2.15 percentage point increase in mortgage rates would see those repayments climb to $2,965 – marking a $700 monthly rise for a mortgage on a median-priced Australian home with a 20 per cent deposit factored in
Dr Lowe noted the underlying measures of inflation, stripping out the biggest price movements, were now on the higher side of the central bank’s two to three per cent target band for the first time in seven years as a result of global supply chain disruptions that affected key components like computer chips.
‘Inflation’s been higher than we were expecting, the global supply chains are proving more contracted, taking longer to resolve than was widely thought likely,’ he said.
‘In the last couple of weeks, the Russian invasion of Ukraine is pushing up commodity prices right across the board.
‘Given these developments, it is plausible interest rates will increase this year – it’s not guaranteed but it’s plausible.’
While wages grew by just 2.3 per cent last year, Dr Lowe noted a lift in pay was ‘clearly taking place’.
Even then, wages growth has been below the long-term average of three per cent since mid-2013.
The Westpac-Melbourne Institute consumer sentiment survey for March showed inflationary concerns at the highest point in 14 years, based on a poll of 1,200 adults.