Rate rise to inflict pain

THE average borrower will have to pay between $11,000 and $22,000 more annually on their mortgage if the Reserve Bank hikes interest rates for a ninth consecutive time on Tuesday.

An expected 25 basis point increase would take the cash rate to a 10.5 year high of 3.35 per cent and mark the latest chapter in one of the most aggressive rate rise cycles in history with 325 basis points worth of hikes since May.

And there are more rates to still to come, according to economists at the country’s largest banks.

“While economists are split on just how high rates will climb, (this) week could be the first of up to four more rate rises this year,” RateCity.com.au research director Sally Tindall said.

“A cash rate starting with a ‘4’ might still be an outside chance, but people should plan for the possibility.”

Westpac and ANZ expect two more hikes after Tuesday to take the cash rate to 3.85 per cent, while NAB forecasted a peak of 3.6 per cent.

Deutsche Bank Australia updated its forecast this week to predict a total of four RBA hikes this year, with the cash rate peaking at 4.10 per cent in August.

Commonwealth Bank said a 25 basis point was expected on Tuesday, but said there was a 25 per cent chance of a 40bps increase with a “stated intention to pause” if economic conditions evolved broadly in line with their updated forecasts.

“We believe if the RBA delivered an outsized hike of 40bp in February, it would be coupled with a stated expectation from the board to keep the cash rate on hold over the period ahead while it assesses the impact of the cumulative rate increases,” CBA head of Australian economics Gareth Aird said.

Westpac chief economist Bill Evans said the guidance from the Reserve Bank would be central to gauging the future trajectory of rate rises, adding that they would retain a “high degree of flexibility”.

“The likelihood is that more evidence of rising wage pressures will mean another rate hike will be necessary at the March 7 board meeting,” he said.

“After that, I think they can go on hold and await the March quarter CPI report that will be available for the May meeting. Our expectations are that inflation will still be running high enough to convince the RBA that a further rate hike is needed.”

Aggressive interest rate rises has led to a surge in households refinancing, which the Australian Bureau of Statistics on Friday said was $19.1bn in December, slightly down from a record high of $19.4bn in November.

It comes as the RBA estimated more than 800,000 households are set to suffer a mortgage repayment shock this year as they shift off cheap fixed rate loans.