None of Australia’s big four banks predicted the steepest monthly increase in interest rates in 22 years to combat the highest inflation in two decades.
The Reserve Bank of Australia on Tuesday raised the cash rate by half a percentage point – the first time it did this since February 2000.
A borrower with a typical $600,000 mortgage will now have their monthly repayments rise by $159.
The experts, who had failed to predict this month’s surprisingly large rate rise, are now warning Australians to brace for another steeper-than-usual increase in July.
None of Australia’s big four banks predicted the steepest monthly increase in interest rates in 22 years to combat the worst inflation in two decades. The Reserve Bank of Australia (Sydney headquarters, pictured) on Tuesday raised the cash rate by half a percentage point – the first time it had done this since February 2000
What the big banks had wrongly predicted
Commonwealth Bank: Up 0.25 percentage points
NAB: Up 0.25 percentage points
WESTPAC: Up 0.4 percentage points
ANZ: Up 0.4 percentage points
Economists at all the big banks expected the RBA to raise rates again in June, following May’s increase, the first back-to-back increases since April and May 2010.
But none of them expected the central bank to impose a 0.5 percentage point rise, which took the cash rate to 0.85 per cent from 0.35 per cent.
RBA rates are at the highest level since October 2019 before the pandemic, with the latest increase double the usual 0.25 percentage point move.
The Commonwealth Bank, Australia’s biggest home lender, and National Australia Bank, Australia’s biggest business lender, predicted a 0.25 percentage point increase in June.
Westpac and ANZ forecast a 0.4 percentage point rise this month.
Westpac chief economist Bill Evans, who was closer with his prediction, said the RBA’s 0.5 percentage point rise was a surprise.
The Commonwealth Bank, Australia’s biggest home lender had predicted a 0.25 percentage point increase in June
So had NAB, Australia’s biggest business lender
‘This bold decision came as quite a surprise to many analysts. Even the decidedly bearish market was priced for a more modest move,’ he said.
RBA Governor Philip Lowe noted inflation was higher than expected, after last year promising to keep interest rates on hold until 2024 ‘at the earliest’.
‘Inflation in Australia has increased significantly,’ he said.
‘While inflation is lower than in most other advanced economies, it is higher than earlier expected.
‘Global factors, including Covid-related disruptions to supply chains and the war in Ukraine, account for much of this increase in inflation.’
Headline inflation in the year to March surged by 5.1 per cent, the steepest annual pace since 2001 and a level well above the RBA’s 2 to 3 per cent target.
Mr Evans is now predicting another 0.5 percentage point increase from the Reserve Bank in July to send a serious message about tackling inflation.
‘The bank now recognises that it has a significant challenge to contain inflation,’ he said.
Dr Lowe noted a series of interest rate rises was likely to hurt consumers already struggling with cost of living pressures.
Westpac had forecast a 0.4 percentage point rise this month
Big Four banks update RBA rate forecasts
WESTPAC: 2.25 per cent cash rate by May 2023
NAB: 2.6 per cent cash rate by August 2024
ANZ: 2.25 per cent by May 2023
COMMONWEALTH BANK: 1.6 per cent by February 2023
‘One source of uncertainty about the economic outlook is how household spending evolves, given the increasing pressure on Australian households’ budgets from higher inflation,’ he said.
‘Interest rates are also increasing.’
CommSec chief economist Craig James said borrowers would be unlikely to be given any certainly on the likelihood of more RBA interest rate rises.
‘Most people would like to know the timing and size of future rate hikes well in advance, as well as how many rate hikes are likely to be necessary to slow down the economy,’ he said.
‘Unfortunately it is not as simple as that.
‘This is more “art” rather than science – hopefully it has mastered the art of rate hiking, but we have doubts.’
Westpac and ANZ expect the RBA cash rate to hit 2.25 per cent by May 2023 for the first time in eight years while CBA predicts a more moderate 1.6 per cent cash rate.
NAB forecast a 2.6 per cent cash rate, which is even more dire than Dr Lowe’s indication last month rates could hit 2.5 per cent during this tightening cycle going into 2023.
The RBA slashed the cash rate to a record-low of 0.1 per cent in November 2020 before raising rates in May during an election campaign for first time since 2007.
As of Wednesday morning, only Westpac had matched the RBA’s half a percentage point rate rise, with its increase coming into effect on June 21.
Its lowest variable rate is increasing by 0.5 percentage points to 2.59 per cent, available for the first two years of a loan subject to RBA cash rate changes.
So had the ANZ bank
How a 0.5 percentage point rate rise will push up YOUR mortgage
$500,000: Monthly repayments rising by $132 from $1,987 to $2,119
$600,000: Monthly repayments rising by $159 from $2,384 to $2,543
$700,000: Monthly repayments rising by $186 from $2,781 to $2,967
$800,000: Monthly repayments rising by $213 from $3,178 to $3,391
$900,000: Monthly repayments rising by $239 from $3,575 to $3,814
$1,000,000: Monthly repayments rising by $265 from $3,973 to $4,238
Calculations based on discount variable mortgage rates rising from 2.54 per cent to 3.04 per cent to reflect the Reserve Bank of Australia cash rate increasing by 50 basis points from 0.35 per cent to 0.85 per cent