The major bank’s grim new interest rate warning

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One of Australia’s big four banks has revised upwards its expectations for Australia’s interest rate in the coming months, suggesting higher mortgage repayments for already struggling households.

Westpac Chief Economist Bill Evans now expects the final rate to settle at 2.6 percent above his previous forecast of 2.37 percent.

It comes from a record low of 0.1 percent – introduced to help the country deal with the pandemic – which has since been raised and stands at 0.85 percent.

camera iconWestpac’s chief economist, Bill Evans, expects the official interest rate to rise even higher than previously thought to 2.6 percent. NCA NewsWire/John Gass Recognition: News Corp Australia

Earlier this month, Reserve Bank of Australia (RBA) Governor Philip Lowe said he expects interest rates to hit about 2.5 percent, with more moves due in the coming months.

“The resilience of the economy and higher inflation mean this extraordinary support is no longer needed,” Mr Lowe said.

“The Board expects to take further steps in the process of normalizing monetary conditions in Australia over the coming months.”

ANZ also expects significant rate hikes in the coming months, given Mr Lowe’s “hawkish rhetoric” who supports a 50 basis point (bps) hike in July and a likely hike in the federal funds rate every month through November.

More than half of Australia’s mortgages are adjustable rate and many more are expected to be when their fixed rate loans mature by the end of 2023.

RBA RATE DECISION
camera iconReserve Bank of Australia Governor Philip Lowe has signaled further hikes are likely before the end of the year. NCA NewsWire/Joel Carrett Recognition: News Corp Australia

“Actually, 90 percent of mortgagors are directly exposed to movements in the RBA cash rate over the next year and a half,” Mr Evans said.

Westpac’s new position on local interest rates follows a revised forecast that predicts a string of aggressive US interest rate hikes to as high as 3.375 percent.

“This cycle for the rest of 2022 will see increases of 75 basis points in July, 50 basis points in September, 25 basis points in November and 25 basis points in December,” Evans said.

“This shift to higher global interest rates has also prompted us to raise our terminal rate for the RBA’s tightening cycle.”

He added that the more aggressive approach is likely to bring the US economy to a standstill, with the risk of a mild recession in the second half of 2023, followed by a fall in the interest rate to 2.125 percent by 2024.

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