Australia

Reserve bank of Australia: Rate hike: Graph shows rate increases may not be as severe as feared

Interest rates may not rise as high as many fear as financial markets are less concerned than some of Australia’s big banks.

Unlike the big banks, the futures market has a better and more consistent track record of predicting official rate hikes.

The Reserve Bank of Australia on Tuesday raised cash rates for the eighth straight month, with the latest increase of 0.25 percentage point taking it to a 10-year high of 3.1 percent, up from the highest in nine years of 2.85 percent.

Two of Australia’s Big Four banks – Westpac and ANZ – expect the RBA to raise rates three more times in February, March and May to an 11-year high of 3.85 percent.

But the futures market, which is betting on interest rates, expects a less severe spike of 3.55 by September.

Rate Hikes May Not Be As Harsh As Many Fear As Financial Markets Are Less Concerned Than Some Of Australia'S Big Banks (Photo From Melbourne Auction)

Rate hikes may not be as harsh as many fear as financial markets are less concerned than some of Australia’s big banks (photo from Melbourne auction)

Rounding it up to 3.6 percent, this would represent an increase of 0.25 percentage points less than Westpac and ANZ expect.

The Australian Securities Exchange’s 30-day interbank cash rate futures pricing is in line with NAB’s forecast that the RBA cash rate will peak at 3.6 percent by March — at least when forecasting the peak level.

But it is factoring in an additional rate hike compared to the Commonwealth Bank, which on Tuesday updated its forecasts to allow the Reserve Bank’s spot rate to end at 3.35 percent in February instead of 3.1 percent in December.

The latest RBA increase means borrowers have endured three percentage points of rate hikes since May.

This is the most severe pace of monetary tightening in a calendar year since the Reserve Bank began publishing a cash rate target in 1990.

It surpasses the 2.75 percentage point increase in 1994.

The eighth consecutive rate hike is also the highest in a row in RBA records stretching back nearly 33 years.

A borrower with an average mortgage of $600,000, with the last rate hike in December, will see their monthly repayments increase by another $91 to $3,236, compared to $3,145.

The Australian Securities Exchange'S 30-Day Interbank Cash Interest Futures Price A 3.6 Percent Spot Interest Rate Spike By September, On A Rounding-Up Basis

The Australian Securities Exchange'S 30-Day Interbank Cash Interest Futures Price A 3.6 Percent Spot Interest Rate Spike By September, On A Rounding-Up Basis

The Australian Securities Exchange’s 30-day interbank cash interest futures price a 3.6 percent spot interest rate spike by September, on a rounding-up basis

Reserve Bank Of Australia Governor Philip Lowe Gave An Explicit Hint On Tuesday That This Latest Rate Hike Would Be Far From The Last

Reserve Bank Of Australia Governor Philip Lowe Gave An Explicit Hint On Tuesday That This Latest Rate Hike Would Be Far From The Last

Reserve Bank of Australia Governor Philip Lowe gave an explicit hint on Tuesday that this latest rate hike would be far from the last

What the big banks now expect from RBA

COMMON WEALTH BANK: 3.35 percent cash rate by February 2023

WESTPAC: 3.85 percent cash rate by May 2023

ANZ: 3.85 percent cash rate by May 2023

NAB: 3.6 percent cash rate by March 2023

This represents an increase of $930 since May, when the era of the record-low rate of 0.1 percent ended.

If the RBA cash rate rose to 3.6 percent — as the futures market expects — monthly payments on a $600,000 mortgage would rise to $3,422.

That would represent an increase of $1,116 from the May 2022 level of $2,306 and $277 above the existing $3,145 repayment obligation before the last rate hike takes effect.

The Commonwealth Bank’s variable rate stood at 2.29 percent in May, when the RBA cash rate hit a record low of 0.1 percent.

The latest rate increase will take it to 5.04 percent, to reflect the new cash rate of 3.1 percent.

If the futures market is to be believed, it would rise to 5.54 percent, reflecting the increase in the Reserve Bank’s cash interest rate by another 0.5 percentage point to 3.6 percent.

The futures market has a good track record of predicting changes in the Reserve Bank’s cash rate.

In July, when the spot rate was still at 1.35 percent, it predicted the spot rate would rise above 3 percent in December – rising to 3.1 percent on Tuesday.

The ASX betting market also rightly had increases every month until the end of 2022.

The charts also fluctuate less than the major banks’ forecasts, with the futures market five months ago predicting a peak of 3.5 percent in March 2023.

In July, When The Spot Rate Was Still 1.35 Percent, It Predicted That The Spot Rate Would Rise Above 3 Percent In December — Rising To 3.1 Percent On Tuesday

In July, When The Spot Rate Was Still 1.35 Percent, It Predicted That The Spot Rate Would Rise Above 3 Percent In December — Rising To 3.1 Percent On Tuesday

In July, when the spot rate was still 1.35 percent, it predicted that the spot rate would rise above 3 percent in December — rising to 3.1 percent on Tuesday

Reserve Bank of Australia Governor Philip Lowe gave an explicit hint on Tuesday that this latest rate hike would be far from the last.

“The board expects to raise interest rates further in the coming period, but it is not on a predetermined course,” he said.

Inflation in the year to September rose 7.3 percent – the fastest increase in 32 years.

While it moderated to 6.9 percent in October, that was a monthly figure based on less comprehensive data than the September quarter figures.

The Reserve Bank still expects headline inflation — also known as the consumer price index — to peak at 8 percent this year for the first time since 1990.

This is more than double the RBA target of two to three percent, with inflation expected to remain above the comfort zone through 2025.

Treasurer Jim Chalmers acknowledged that the latest rate hike would be far from the RBA’s last.

“They have indicated that further increases may be necessary,” he told ABC Radio.

Two Of Australia'S Big Four Banks - Westpac And Anz - Expect The Rba To Raise Rates Three More Times In February, March And May To An 11-Year High Of 3.85 Percent (Stock Image)

Two Of Australia'S Big Four Banks - Westpac And Anz - Expect The Rba To Raise Rates Three More Times In February, March And May To An 11-Year High Of 3.85 Percent (Stock Image)

Two of Australia’s Big Four banks – Westpac and ANZ – expect the RBA to raise rates three more times in February, March and May to an 11-year high of 3.85 percent (stock image)

What a 0.25 percentage point rate hike means for borrowers

$500,000: $76 up to $2,697 from $2,621

$600,000: $91 up to $3,236 from $3,145

$700,000: $106 up to $3,775 from $3,669

$800,000: $122 up to $4,315 from $4,193

$900,000: $137 up to $4,854 from $4,717

$1,000,000: $152 up to $5,393 from $5,241

Monthly mortgage payment rises based on Commonwealth Bank floating rate rising 0.25 percentage point to 5.04 per cent from 4.79 per cent to reflect Reserve Bank of Australia cash interest rate increase of 2.85 per cent in December to 3.1 percent

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Jacky

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