Warning on rate hikes
HOME loan borrowers face a short and sharp series of interest rate hikes which threaten to add an extra $375 to the average monthly repayment bill, a former Reserve Bank board member has warned.
Highly-respected 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.
Mr Edwards said the cash rate is “way below” where it needs to be should the RBA’s own 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 return to 3 per cent in the next few years as the RBA expects, Dr Edwards 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 that 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.”
Dr Edwards said the current 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.
While the RBA would not want to increase rates “too abruptly or unexpectedly”, Dr Edwards 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 while his successor Glenn Stevens took less than two years to lift the rate from 5.5 per cent in April 2006 to 7.25 per cent in March 2008.
The Bank for International Settlements, the governing body of central banks, this week warned Australia’s record levels of household debt leaves it highly vulnerable to a sharp rise in global interest rates.
AMP Capital chief economist Dr Shane Oliver said Dr Edward’s forecast “seemed extreme” and noted the RBA had consistently over-estimated economic growth in recent years.
Dr Oliver said low wage growth and underemployment would keep inflation low for the foreseeable future.
“I struggle to see much of any interest rate hikes in the coming years,” he said.