This week, Westpac chief economist Bill Evans lifted his interest rate prediction, betting the Reserve Bank of Australia (RBA) will raise the official cash rate (OCR) by 0.5% to 2.85% on 4 October before reaching a peak rate of 3.6% by February 2023.
Westpac’s upward revision is driven primarily by the more hawkish rhetoric coming from the US Federal Reserve:
[We have] raised the terminal rate from 3.35% to 3.6%.
Raising the terminal rate by 25bps compared to the 75bp increase in the federal funds rate still acknowledges Australia’s higher sensitivity to the central bank’s policy instrument…
We have not changed our post October profile with increments shifting down to 25bp as emphasised in the comments above…
But unlike most analysts we continue to expect that the tightening cycle will continue for November, December and February…
Readers may see that 3.6% terminal rate as ‘over-tightening’ but our view is that the growth rate required to achieve the objective of wringing inflation out of the system is consistent with the 3.6%.
Westpac’s hawkish interest rate forecast would see Australia’s discount variable mortgage rate soar to 6.95% – more than double its level in April (3.45%) immediately before the RBA’s first rate hike:
Westpac tips highest mortgage rate since October 2011.
This would be the highest mortgage rate since October 2011.
If mortgage rates were to rise this aggressively, Australian mortgage holders would face a massive jump in their repayments.
As illustrated in the next table, average mortgage repayments would rise 48% above their pre-tightening level under Westpac’s OCR forecast, adding around $1,080 a month in repayments to a $500,000 variable rate mortgage:
Many recent mortgage holders would be plunged into severe financial stress at the same time as their home values tank, especially if they purchased in Sydney or Melbourne.
In turn, the economy risks being thrown into recession via a sharp contraction in household consumption – the economy’s main growth driver.
For these reasons, the sensible side of me hopes Westpac is wrong with its OCR forecast. But the evil part of me wants to see the RBA hike that far just to see what happens. I believe it would be carnage.
