Australia’s major banks predict interest rates will rise after the budget as ‘red-hot’ inflation hits a 32-year high and the treasurer admits being kept up at night’.
The cost of living rose an extraordinary 7.3 percent in the year to September, with headline inflation rising at its strongest pace since 1990, official data released Wednesday showed.
That grim post-budget figure prompted three of the country’s largest banks to change their predictions about how high Australia’s spot interest rates will rise.
ANZ and the NAB are now forecasting that the Reserve Bank could raise interest rates by more than 0.5 percentage points next Tuesday – although they think a 0.25 percentage point increase is more likely on Melbourne Cup Day.
Even a small increase of a quarter of a percentage point on Nov. 1 will leave typical borrowers owing an additional $90 per month on their repayments — just as the cost of gasoline, fruit and vegetables is rising in double digits.
Inflation in Australia is up 7.3 percent – the fastest pace in 32 years as fruit and vegetable prices rose 16.2 percent (pictured is a grocer in Sydney’s Paddy’s Market)
Banks expect even higher rates
ANZ: A 3.85 percent spot rate peak in May 2023 with an external probability of 0.5 percentage point increase in November
COMMONWEALTH: A peak of 3.1 percent spot interest in December with increases of 0.25 percentage points in November and December
NAB: A peak of 3.1 percent in December with increases of 0.25 percentage points in November and December, but out of the chance of a 0.5 percentage point increase in November
WESTPAC: A peak of 3.6 percent in March 2023 with increases of 0.25 percentage points in November and December
An interest rate hike of half a percentage point next week would push the cash interest rate to a new 10-year high of 3.1 percent.
ANZ now also expects the spot rate to peak at 3.85 percent in May next year, up from its earlier forecast of 3.6 percent.
“These broad, domestically driven inflationary pressures are intractable and harder for the RBA to contain,” said ANZ economists David Plank and Catherine Birch.
The Commonwealth Bank, Australia’s largest mortgage lender, still expects a 25 basis point rate hike in November, but describes inflation as Australia ‘red hot’.
But Gareth Aird, CBA’s chief of Australian economics, now expects RBA interest rates to rise another 0.25 percentage points in December, pushing the spot rate to peak at 3.1 percent instead of 2.85 percent.
“There are no two ways to do this – inflation is red hot in Australia right now, as it is in many parts of the world, and we expect the RBA to respond by raising the spot rate again at the board meeting of November next week,” he said.
NAB also updated its forecast with two 0.25 percentage point increases in November and December, bringing the spot rate to 3.1 percent.
“We see moves of 25 basis points as likely, but a 50 basis point increase in November is possible given today’s CPI print,” said chief economist Alan Oster.
Westpac was the only major bank to update its forecasts Wednesday afternoon, according to the Australian Bureau of Statistics’ latest consumer price index.
Borrowers since May have endured six consecutive monthly hikes, pushing the Reserve Bank’s spot interest rate to a nine-year high of 2.6 percent — marking the most severe monetary tightening since 1994.
ANZ (Sydney branch pictured) and the NAB are now forecasting that the Reserve Bank could raise interest rates by more than 0.5 percentage points next Tuesday – although they think a 0.25 percentage point increase is more likely on Melbourne Cup Day
Major price increases in year to September
PETROL: up 18 percent
FRUIT VEGETABLES: 16.2 percent
HOUSING: 10 percent
Another rate hike in November, regardless of size, will be the seventh in a row — something the RBA hasn’t done since it began publishing a cash target in 1990.
Inflation data, released just a day after the budget, showed that the cost of living crisis is worsening and energy costs are also rising.
Gasoline prices rose 18 percent in the year to September, with Russia’s invasion of Ukraine leading to sanctions that pushed up fruit oil prices.
The cost of fruit and vegetables rose by a staggering 16.2 percent in the year to September following recent floods on Australia’s east coast and the inability of growers to find enough foreign backpackers during harvest time.
Housing costs rose 10.5 percent as a result of tighter rental vacancy in Sydney and Melbourne, while total food costs rose 9 percent.
The prices of bread and grains rose by 10 percent, while the costs of dairy products rose by 12.1 percent.
Headline inflation in the September quarter climbed at the fastest annual pace since June 1990, with the Treasury expecting Australians to cut their real wages until 2024.
Treasurer Jim Chalmers (pictured right with wife Laura) responded to the bad news by stating that the rising cost of living ‘keeps us awake’
Headline inflation in the September quarter climbed at the fastest annual pace since June 1990, with the Treasury Department expecting Australians to cut their real wages until 2024
The consumer price index of 7.3 percent is more than double the Reserve Bank’s target of 2 to 3 percent, meaning more interest rate hikes in 2022 and possibly 2023.
Treasurer Jim Chalmers responded to the bad news by stating that the rising cost of living is “keep us awake.”
“We see what rising prices mean for families who are getting more out of their hip pockets and pushing people closer to the brink,” he told the National Press Club in Canberra on Wednesday.
The inflation increases are in line with the Treasury Department’s forecast that annual inflation will reach a new 32-year high of 7.75 percent in the December quarter, following the end of the fuel tax halving.
Inflation is much faster than wage growth, which means that workers experience a real wage cut.
dr. Chalmers, who delivered Labor’s first budget in nearly a decade, acknowledged that the rising cost of living would erode any pay rise for another two years.
“Wages are growing faster now than before the election, but that welcome news is being dampened by rising electricity prices and wage-cutting messages,” he told parliament on Tuesday evening.
Gasoline prices rose 18 percent in the year to September, but this was much more moderate than the annual price of 35.1 percent in March (pictured in Sydney’s Surry Hills), as the Russian invasion of Ukraine triggered sanctions that pushed up fruit oil prices.
What does an interest rate rise of 0.25 percentage point in November mean?
$500,000: $75 up to $2,621
$600,000: $90 up to $3,145
$700,000: $105 up to $3,669
$800,000: $120 up to $4,193
$900,000: $135 up to $4,717
$1,000,000: $150 up to $5,241
Monthly repayment increases based on a Commonwealth Bank variable loan, rising to 4.79 percent from 4.54 percent to reflect the Reserve Bank of Australia’s cash interest rate rising to 2.85 percent from 2.6 percent
“If inflation weakens, real wages are expected to rise again in 2024.”
The wage price index grew by just 2.6 percent in the year to June, while inflation grew by 6.1 percent.
A Canstar analysis showed that working Australians needed a wage increase of $6,637 to keep up with inflation in the past year.
Treasury expects wage growth to reach 3.75 percent by June 2023, which would be the fastest wage increase since 2012.
But even if inflation were to decline to 5.75 percent by mid-next year, as the Treasury predicts, Australians would still face a real wage cut.
Wage packages were expected to continue growing at 3.75 percent in 2023-24, but inflation is expected to decline to 3.5 percent by then.
Treasury expects household electricity bills to rise 56 percent in two years, questioning Labor’s election promise to cut energy bills by $275 by 2025.
Higher inflation also means more financial sacrifice for home borrowers, who have experienced six consecutive monthly rate hikes since May — pushing the cash interest rate to a nine-year high of 2.6 percent.
Another rate hike on Nov. 1 of 0.25 percentage points would push rates to 2.85 percent and a borrower with an average $600,000 mortgage would owe an additional $90 per month in loan repayments.
Australia’s Big Four banks are all expecting the RBA to raise cash interest rates by another 0.25 percentage points on Melbourne Cup Day (pictured is a house in Melbourne)