Top money man tips rate surges

HOME loan borrowers face a short and sharp series of interest rate hikes that threaten to add an extra $375 to the average monthly repayment bill, a former Reserve Bank board member has warned.

Economist John Edwards says home loan borrowers should brace for eight consecutive hikes to the nation’s official cash rate over the next two years.

Dr Edwards said the cash rate was “way below” where it needed to be should the RBA’s economic growth and inflation forecasts pan out.

The cash rate would need to be hiked from 1.5 per cent to 3.5 per cent by the end of 2019 if Australia’s economic growth rate returned to 3 per cent in the next few years as the RBA expected, he said.

The average standard variable mortgage would rise from 4.44 per cent to 6.44 per cent under such a scenario, analysis from financial services firm Mozo shows.

A borrower with a $300,000 loan would need to find $375 extra per month.

“It seems to me something like eight quarter-percentage point tightenings over 2018 and 2019 are distinctly possible if the RBA’s economic forecasts prove correct,” Dr Edwards wrote in a paper for the Lowy Institute think tank.

“It’s possible the tightening could start earlier, or if not the tightening itself, at least the signalling which should precede it. We may be seeing a little of that now.”

He said the cash rate was outside any historic norm given it had averaged 5.2 per cent over the past 20 years and only fell to 3 per cent in the wake of the 2008 global financial crisis.

Dr Edwards was a RBA board member from 2011 to 2016 and chief economist for the Australian and New Zealand arm of global financial services group HSBC for 12 years.

He cautioned the inevitable lift in borrowing costs would not necessarily be “gentle or gradual”.

Former RBA governor Ian Macfarlane hiked the cash rate 1.5 per cent to 6.25 per cent in the 10 months to August 2000.

AMP Capital chief economist Shane Oliver said Dr Edwards’ forecast “seemed extreme” and noted the RBA had over-estimated economic growth in recent years.

“I struggle to see much of any interest rate hikes in the coming years,” Dr Oliver said.