Resilience in the economy has caught the attention of economists, with a major bank making an amendment in their interest rate projections that will concern Aussie homeowners.
Deutsche Bank, in anticipation of an upcoming RBA cash rate decision on Tuesday, has revised its peak cash rate forecast from 4.1 per cent in August to 4.6 per cent in September.
Phil O‘Donoghue, Chief Economist at Deutsche Bank, highlighted several factors behind this decision in a research note.
The economy has exhibited relative resilience in household spending and the labour market, with a notable rebound in the housing market. Additionally, a recent wage decision has influenced the upgrade.
Following the decision by the industrial umpire on minimum and award wages, annual wage growth is anticipated to surpass the Reserve Bank of Australia‘s projection of 4 per cent and reach around 4.5 per cent.
O’Donoghue emphasised that the economy has been navigating the tightening monetary policy initiated in May 2022 far more successfully than initially anticipated.
“We now anticipate the likelihood of multiple rate hikes before the year‘s end. The only remaining uncertainty for us is when these hikes will take place,” he said.
Meanwhile, respected finance guru Peter Switzer is advising the Reserve Bank to exercise caution and abstain from implementing further interest rate hikes until concrete data on the impact of increased wages and inflation emerges.
During an interview with Sky News Australia, Switzer emphasised that while the inflation data from April hinted at a marginal rise of 6.8 per cent, the inflation figure for May stood at a mere 0.3 per cent. Such low inflation could potentially justify a pause in rate hikes.
Switzer argued that Governor Philip Lowe had valid grounds to “hold fire” and cautioned against the adverse consequences that may arise from persistently raising rates. He expressed concerns about the impending mortgage cliff, which he believes will accentuate existing problems and lead to a slowdown in Australia‘s economy.
When asked if the recent minimum wage increase for thousands of workers announced by the Fair Work Commission would impact the decision, Switzer responded affirmatively, stating that it would definitely play a role.
He highlighted the wage expectations of aviation workers, public servants, and ABC staff, and how other unions were piggybacking on these demands. These factors give reason for the RBA governor to exercise caution.
Despite this, Mr. Switzer acknowledged that Australia has experienced 11 consecutive rate hikes at an unprecedented pace of tightening, emphasising the need to respect this trajectory before making further moves.
Following the Fair Work Commission‘s announcement, financial markets promptly adjusted their pricing to reflect an increased likelihood of another rate hike.
The probability of an increase rose from 25 per cent at the beginning of the week to around 60 per cent.
Prominent economists have also adjusted their rate predictions. ANZ, Credit Suisse, Macroeconomic Advisory, Jarden, and Nomura now anticipate an increase from the current 3.85 per cent to 4.6 per cent by the end of the financial year. Goldman Sachs and Capital Economics have updated their forecasts to a 4.35 per cent cash rate by July.
These revised predictions are not solely based on wage increases. Persistent inflation in services, particularly rising rents, and a lack of productivity growth have led experts to suggest that rate cuts may not occur until late 2024.
This situation unfolds amid mounting challenges for mortgage holders. According to S&P Global Ratings’ RMBS Performance Watch: Australia report, the country’s 30-day prime mortgage arrears rose from 0.76 per cent in 2022 to 0.95 per cent in the March quarter. Sydney, Australia’s priciest housing market, recorded the highest number of homeowners falling behind on mortgage repayments.
The impact is most acute in outer ring suburbs, where first-time homebuyers, who are more vulnerable to mortgage stress, are prevalent.
Experts are particularly concerned about the looming mortgage cliff, which could result in numerous Australians defaulting on their loans, leading to severe economic damage and jeopardising livelihoods.