Australian borrowers face the biggest monthly rise in interest rates in nearly 30 years – a whopping 75 basis points – as inflation worsens, but it could be even bigger after the Canada raised rates by a full percentage point.
Deutsche Bank expects the Reserve Bank of Australia to raise the benchmark rate in August by 0.75 percentage points in early August, which would be the biggest monthly increase since 1994.
If this prediction were to come true, a borrower with an average mortgage of $600,000 would see their monthly repayments soar by $256 as cost of living pressures intensify.
It would be the fourth straight monthly rate hike since May, and it would mean a $654 rise in monthly variable mortgage repayments in just three months, as rates climb at the fastest rate in 28 years.
The lowest unemployment rate in 48 years also raises the risk of a wage-price spiral, with Australian inflation set to reach levels not seen since 1990.
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Australian borrowers are facing the biggest monthly interest rate rise in three decades as inflation worsens and unemployment is now at a 48-year low. Deutsche Bank expects the Reserve Bank to raise the cash rate by 0.75 percentage points in August, which would be the biggest monthly increase since 1994
Unemployment in June plunged to 3.5% from an already low 3.9% in May, as the jobless rate halved in just two years. Last month, 88,400 new jobs were created, including 52,900 full-time positions, bringing unemployment to its lowest level since August 1974.
A very low unemployment rate adds to inflationary pressures as employers struggle to find staff, leading companies to raise prices to reflect higher production costs.
Why a 0.75 percentage point rate hike is a big deal
A 0.75 percentage point rise in interest rates in August would be the largest monthly rise since December 1994
Canada raised interest rates this week by one percentage point – bringing the cash rate to 2.5%, the same as New Zealand’s
Before the last hike, Canadian borrowers had taken 1.25 percentage points in increases this year – the same as in Australia
Canadian interest rates increased by 0.25 percentage point in March, 0.5 percentage point in April, 0.5 percentage point in June and 1 percentage point in July to reach 2.5%.
Australian interest rates increased by 0.25 percentage point in May, 0.25 percentage point in June and 0.5 percentage point in July to reach 1.35%.
New Zealand interest rates increased by 0.25 percentage point in October 2021, by 0.25 percentage point in November, by 0.25 percentage point in February, by 0.5 percentage point in April, by 0.5 percentage point in May and by 0.5 percentage point in July to reach 2.5%.
ANZ Bank expects inflation data for the June quarter, due out July 27, to show the consumer price index rose 6.3% – the annual rate the fastest since 1990 and at a level well above the Reserve Bank’s 2-3%. target.
Phil O’Donaghoe, Deutsche Bank’s chief economist for Australia, said worsening inflation could lead the RBA to raise interest rates by 0.75 percentage points on August 2, as she worried about a strong labor market causing wages to rise.
“One of the challenges, certainly for the Reserve Bank, is trying to prevent that kind of force from manifesting itself in wage growth inconsistent with the inflation target,” he told Reuters. the 2GB Brooke Corte radio.
“When there is such a high demand for labor – for a few years, with the border effectively closed – the demand for skills is so high that as long as consumers are willing to pay, the temptation for businesses is simply to ‘raise wages and pass this on.
“So the risk for the RBA is trying to manage this extremely strong economy without getting into a wage-price spiral that threatens the medium-term sustainability of the inflation target.”
Mr O’Donaghoe’s prediction of a 75 basis point hike, if realized, would be the biggest monthly increase since December 1994, when the cash rate rose a full percentage point.
Canada raised its policy rate this week by 100 basis points while New Zealand raised its policy rate by 50 basis points.
The two Commonwealth countries now have a cash rate of 2.5% – a level well above Australia’s high three-year cash rate of 1.35%.
Canada raised its cash rate by 100 basis points this week as the nation led by Prime Minister Justin Trudeau (pictured) grapples with 7.7 per cent inflation – the worst since 1983, when his father Pierre Trudeau was prime minister.
A 75 basis point hike in August would take the RBA’s cash rate to 2.1%, the highest level since May 2015.
But Mr O’Donaghoe said there was an outside chance that the Reserve Bank of Australia would copy the Bank of Canada and opt for a 100 basis point hike in August, taking the exchange rate to 2, 35%.
“I can very easily replace Canada with Australia,” he said.
“The same kinds of factors are at play here.”
Before the last rate hike in Canada in July, borrowers there had already seen 1.25 percentage points of rate increases in 2022.
Australian borrowers in May, June and July have already seen 1.25 percentage points in rate hikes – the fastest pace since 1994.
Similar to Canada, Australian interest rates rose 0.25 percentage points, followed by two increases of 0.5 percentage points.
Australia’s 0.5 percentage point rise in June was already the biggest since February 2000, while May’s 0.25 percentage point rise was the first since November 2010.
New Zealand this week hiked its cash rate by 50 basis points as Kiwis battle inflation of 6.9% – the worst since 1990 when Prime Minister Jacinda Ardern (pictured) was in primary school
Phil O’Donaghoe, Deutsche Bank’s chief economist for Australia, said worsening inflation could see the RBA raise interest rates by 0.75 percentage points in August as it s worried about a strong labor market causing wages to rise (pictured at an auction in Melbourne)
Three of Australia’s big four banks – Commonwealth, ANZ and NAB – are raising their variable rates on Friday, with Westpac following on July 20.
Australia’s headline inflation rate in the year to March of 5.1% was already the biggest increase since 2001.
ANZ expects the June quarter figure to show an increase of 6.3%, which would be the biggest increase since 1990.
The bank expects Australia’s headline inflation rate to hit 7.4% later this year, an even harsher forecast than Reserve Bank Governor Philip Lowe’s forecast of a 7% inflation.
A possible sign of things to come for Australia, Canada’s inflation rate of 7.7% in May was the fastest rise since 1983, when Prime Minister Justin Trudeau’s father, Pierre Trudeau , was prime minister.
New Zealand’s March quarter inflation rate of 6.9% was the highest since 1990, when Prime Minister Jacinda Ardern was still in primary school.
The US inflation rate of 9.1% in June was the highest since 1981.
While unemployment in Australia was low in 1974, the oil crisis in the Middle East caused the unemployment rate to soar, reaching 10.2% in April 1983 after inflation reached 11.4% in the quarter of March of that year.
“If we don’t stem these inflationary pressures in the short term, you will find yourself in five or ten years with fewer jobs,” Mr O’Donaghoe said.
He said a 75 basis point RBA hike in August would send a message to “price and wage setters that the Reserve Bank does not tolerate inflation above target”.
A 100 basis point move, while possible, was less likely because the Reserve Bank of Australia met monthly compared to the six-week gaps between Bank of Canada meetings.
What would a 0.75 percentage point rate hike in August mean for YOU?
$500,000: Up to $231 from $2,215 to $2,428
$600,000: Up to $256 from $2,658 to $2,914
$700,000: Up to $298 from $3,101 to $3,399
$800,000: Up to $341 from $3,544 to $3,885
$900,000: Up to $383 from $3,987 to $4,370
$1,000,000: Up to $426 from $4,430 to $4,856
Increases based on Deutsche Bank’s forecast that the Reserve Bank of Australia would raise the cash rate in August by 0.75 percentage points from 1.35% to 2.1%, taking a floating rate from the Commonwealth Bank from 3.39% to 4.14%