Two of the nation’s biggest lenders have warned homeowners to brace for another bruising interest rate rise when the Reserve Bank next meets again in November.
Alarmingly for families already buckling under the financial strain, one senior economist has even warned inflation may not be reined in without the cash rate going much higher.
As expected, the RBA hiked the official cash rate by 25 basis points on Tuesday to a 15-year high of 4.6 per cent, with governor Michele Bullock conceding the economic fallout of the US war with Iran in the Middle East had “made us all poorer”.
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A borrower with an average new mortgage of $731,000 will now see their repayments climb by another $121 a month. Across all four increases that’s an extra $475 a month — or $5700 a year.
But Westpac on Wednesday told mortgageholders the pain may not stop there, with the bank tipping the RBA will have to act again on Melbourne Cup Day and take the rate to 4.85 per cent.
Home loan customer have not seem rates that high since December 2008.
Westpac’s Luci Ellis, a former chief economist at the central bank, said on Wednesday that the bar for a follow-up hike in November was low and, following Ms Bullock’s gloomy post-rate call press briefing, was now likely.
“A November hike is now the base case, absent a lasting resolution of the Middle East conflict beforehand, or some other event that significantly lowers the outlook for energy-related costs in Australia,” Ms Ellis said.
“The bar for hikes beyond that is much higher, given the cumulative rise in interest rates, and noting that the labour market is easing and the housing market will likely weaken further.”
Westpac’s prediction echos that of rival ANZ, which even before Tuesday’s hike had forecast two more increase would be required in 2026.
EQ Economics economist Warren Hogan agreed that bigger forces putting upward pressure on inflation were unlikely to be curtailed by a single hike, and warned the RBA may not find a terminal rate until it entered the 5s.
“The market is pricing in another rate hike this year and a very high probability of a third hike in early 2027, which is a reasonable assessment,” Mr Hogan said.
“If Australia’s governments cannot cut spending (fiscal tightening), the RBA will be under pressure to keep raising rates until policy is genuinely restrictive.
“From a whole of economy perspective, the cash rate will not be restrictive until it gets above 5 per cent and probably closer to 5.5 per cent (a real interest rate of about 2 per cent).
“But in the absence of an unexpected downturn in the economy, and without a restrictive fiscal policy, I cannot see how two rate hikes and a cash rate below 5 per cent can deal with the worst inflation problem Australia has faced in 50 years.”
Much will depend on Wednesday’s release of the latest inflation data from the Australian Bureau of Statistics, which is expected to show trimmed mean — the stripped-down measure of underlying inflation preferred by the RBA — holding steady at an annualised 3.6 per cent.
Ms Bullock warned on Tuesday that it could take a recession to control inflation, which has remained outside the RBA preferred 2 to 3 per cent range for more than a year.
Conflict in the Middle East and booming demand for AI data centres were expected to keep inflation elevated, she said.
“The board will raise interest rates again if that’s what needed to bring inflation down,” Ms Bullock said.
“High inflation hurts all of us, especially the most vulnerable. Pay packets don’t go as far as they used to and that’s why we need to stop this high inflation.
“We knew that this was going to hit some people pretty hard but we have to do it if we are to bring inflation back down — ultimately, in the long run, hopefully in those couple of years when we get inflation back down, this will all have been worth it.”
The cumulative pain for the hundreds of extra dollars each month that millions of Australian households have already had to find this year will only be exacerbated if the RBA is forced to hike again in November.
Someone with a $500,000 an average mortgage with 25 years remaining would need to find an extra $77 a month, taking their total extra cost across five hikes to $380 a month.
Someone with a $700,000 loan on the same terms would need an extra $92 a month, or $456 over the full five hikes.
For a $1 million loan, it would be an extra $759 a month.
