Westpac has made a surprise call on interest rates – lowering its forecast that the cash rate will be hiked as high as 4.1 per cent.
Instead, the major bank has predicted interest rates will peak at 3.85 per cent and that the Reserve Bank of Australia (RBA) will even put a pause on any rates hikes in April.
However, Westpac chief economist Bill Evans has predicted that interest rates will be raised for a final time this year in May to 3.85 per cent.
He noted the RBA governor had done an “about face” following the March board meeting and only “tentatively” signalled the possibility of rate rises.
Despite a stronger than expected unemployment rate – a lift in employment of 64,600 jobs and a fall in the unemployment rate from 3.7 per cent to 3.5 per cent – Mr Evans added wage growth was still weak.
But the major change since the March RBA Board meeting has been the adverse developments in global markets as Silicon Valley Bank collapsed causing fears of a contagion, he said.
“The most realistic risk scenario for the US economy involves a credit squeeze from regional banks – generally those with assets below $250 billion … As markets, regulators and rating agencies restrict the capacity of these smaller banks to support small and medium enterprises and small business – around 50 per cent of total market coverage – a new drag will emerge for the US economy,” he explained.
“This is also likely to undermine confidence and raise some questions about the stability of the global banking system. Wildly gyrating markets are highlighting the uncertainty around
this scenario.”
He has predicted the RBA will be forced to stop raising interest rates from June as economic conditions worsen and does not expect any more interest rate rises for 2023.
“By the time of the June meeting, with the cash rate deeply in contractionary territory, the economy slowing at a more rapid pace, and evidence from the March quarter wage price index that the trajectory for wages growth remains moderate, it will be appropriate to delay any further tightening until the next quarterly inflation report, released ahead of the August Board meeting,” he added.
“We expect that by August the case for pushing the cash rate even further into contractionary territory will be weak as the economic slowdown becomes more entrenched and as we start
to see real progress in lowering inflation, especially if global credit issues continue to impact growth and markets.”
Interest rates have skyrocketed from a record low of 0.1 per cent to 3.6 per cent since last May.
Mr Evans also maintained that interest rates would start to be cut again from the second quarter of next year between March and May.
“These include a fall in the inflation rate to below 4 per cent, policy deeply in contractionary territory – we see the neutral cash rate as being around 2.75 to 3 per cent, the economy stagnating through the second half of 2023 and the prospect of continued weakness in the first half of 2024; the unemployment rate heading towards 5 per cent by end 2024; and wages growth slowing from a 2023 peak of 4 per cent.”
The predictions come as warnings have been issued that Aussies could fall into the trap of becoming a home loan hostage – a term coined to describe customers who might be unaware that simple life decisions could impact their ability to refinance their mortgage with a new lender.
This is different to a mortgage prisoner who has no option to refinance as they can’t meet current borrowing rules or don’t have enough equity in their home.
Instead, new research found that common life decisions currently being considered by Aussies could put borrowers at risk including planning to change jobs (19 per cent), having a child (8 per cent) and getting a new credit card, personal loan or car loan (18 per cent).
“Home loan customers might be unaware that when they go to refinance their home loan with a new lender, they are assessed as though they are a new borrower, taking into account their financial standing beyond their history of meeting repayments and their lending to value ratio,” said Kylie Moss director at Mozo.
“The key difference between a home loan hostage and mortgage prisoner is that a hostage may temporarily find it difficult to refinance. While a prisoner is someone who is facing extreme financial hardship and is unable to refinance their mortgage and may have to default on their repayments, apply for financial hardship, or sell their property.”
Mozo’s research also found that three-in-eight borrowers are not aware that lenders apply a 3 per cent serviceability buffer to the home loan rate at the time of application, which factors in a borrower’s capacity to meet higher home loan repayments should rates increase.
For example, a borrower applying to refinance to the average variable rate of 5.85 per cent would be assessed on their ability to make repayments at a rate up to 8.85 per cent.
On a $500,000 loan, this would mean the borrower would be assessed on their ability to meet repayments of $4145 a month, rather than the $3176 required at the current interest rate.
“Aussies who are planning on refinancing over the next year should forward plan big life and financial decisions to avoid becoming a home loan hostage, as well as see if they can tighten up their cash flow in the months leading up to application,” said Ms Moss.
Meanwhile, around one in ten Aussie households are also cutting back on groceries as cost of living pressures bite, a recent survey from professional accounting body CPA Australia found.
While the majority surveyed said they were cutting back on luxury expenses such as holidays and gym memberships, it was concerning people are cutting back on groceries said CPA Australia senior manager business and investment policy Gavan Ord.
“Cash strapped people are also foregoing trips to the doctor and the dentist, with six per cent responding they were cutting back on health and dental care to save money,” he said.
“Some are looking to save money by using their car less. A reported eight per cent said they were cutting back on car and transport costs.
“After 10 consecutive interest rate rises we’re now seeing Australians from many different income levels being forced to cut costs where they can.
“This change in consumer behaviour is hitting business confidence. Over the past three years, business have had to adapt to Covid-19, supply chain pressures, skills shortages and higher costs. They will now need to adapt to a more cost conscious consumer to remain viable.”