Westpac issues grim interest rate warning

by Mina Martin25 Jun 2022

Westpac has revised its expectations for Australia’s interest rate over the coming months, suggesting more hip pocket pain for the already struggling mortgage holders.

The revised forecast comes following a record low rate of 0.01%, to help the country cope during the COVID-pandemic – which has since been lifted and now sits at 0.85%.

From a previous forecast of 2.37%, Westpac chief economist Bill Evans now expects the terminal interest rate to hit 2.6%, news.com.au reported.

Earlier this month, Reserve Bank governor Philip Lowe said the rate could potentially reach around 2.5%, with more moves due in the coming months.

“The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed,” Lowe said. “The board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead.”

ANZ, meanwhile, is also expecting significant rate hikes over the coming months, considering Lowe’s “hawkish rhetoric” that supports a 50 basis points (bps) hike in July and a likely increase to the cash rate in each month until November, news.com.au said.

More than half of Australian mortgages are currently on floating rate terms, with many more expected to follow when their fixed rate loans mature by the end of 2023.

“Effectively 90% of mortgage borrowers are directly exposed to moves in the RBA cash rate over the next year and a half,” Evans told news.com.au.

Westpac’s new position on the local cash rate comes on the back of a revised forecast predicting a series of aggressive rate hikes in the US hitting 3.375%.

“That cycle for the remainder of 2022 will entail increases of 75 bps in July, 50 bps in September, 25 bps in November and 25 bps in December,” Evans said. “This shift toward higher global rates has also led us to lift our terminal rate for the RBA’s tightening cycle.”

Evans also said the more aggressive approach would likely stall the US economy, with the risk of a mild recession in the second half of 2023 followed by a decline in the interest rate to 2.125% through 2024, news.com.au reported.