Home buyers taking on huge loans to get into Australia’s property market could face higher mortgage repayments as early as November next year with the nation’s biggest lender predicting the Reserve Bank will hike rates much sooner than expected.
Commonwealth Bank head of Australian economics Gareth Aird on Wednesday said not only would the RBA have to reconsider its interest rate strategy, but the federal government may have to make a choice between higher wages growth or letting in more immigrants to help staff local businesses.
The Reserve Bank has had official interest rates at 0.1 per cent since November last year, saying it does not expect wages growth and inflation will be high enough for it to lift rates until 2024 “at the earliest”.
But with unemployment at 5.1 per cent and businesses complaining of staff shortages, many analysts have started to doubt the bank will keep rates unchanged for the next three years.
Mr Aird said a cash rate of 0.5 per cent by the end of next year, reaching 1.25 per cent by the third quarter of 2023, was now much more likely. An increase in the cash rate to 0.5 per cent would take the monthly repayments on a 25-year, $450,000 mortgage to $2158, an increase of $93.
The last time the RBA increased interest rates was in November 2010 when they were taken to 4.75 per cent.
Mr Aird said, beyond that point, the federal government’s budget spending and the targeted level of net overseas migration would have a large impact on wages growth and the future path of interest rates.
“This does not mean that the international borders need to remain closed or that firms cannot hire from a global pool of labour,” he said. “But it does mean that the targeted level of immigration in the economy will need to be recalibrated when the international borders are reopened if wages growth is to make a more permanent lift to around 3 per cent per annum.”
The federal government is forecasting a deficit of $99.3 billion for 2022-23. It also is assuming net overseas migration of 95,900 that year, after losing a net 77,400 people in 2021-22.
AMP Capital chief economist Shane Oliver expects a rate hike in 2023, although he said next year wasn’t completely out of the question.
He cautioned that limiting population growth by reducing the nation’s intake of migrants wouldn’t necessarily help the economy.
“It’s ambiguous in terms of what it [shut borders] means for wages and prices growth. There are skills shortages in some industries but it’s not a general thing,” Dr Oliver said.
“It helps boost wages in the short-term due to shortages of workers but there’s less demand in the economy ... which means fewer workers needed anyway. You can argue in a circle.”
Westpac chief economist Bill Evans, who is tipping the cash rate to be pushed up to 0.75 per cent by the third quarter of 2023, said the jobs market was much stronger than when the RBA first made its 2024 pledge.
“Over the next few months we’ll see the Reserve Bank moderate that 2024 at the earliest guideline,” he said.
RBA assistant governor Luci Ellis on Wednesday maintained the bank’s position about interest rate movements, saying it was committed to “maintaining highly supporting monetary conditions”.
She added a new reason to the bank’s thinking about low rates, arguing that a strong post-pandemic recovery made it easier for businesses to make any structural changes that might be necessary.
“It is far easier for a firm to change business models when demand is robust, and far easier for a worker to switch industries or careers when there are plenty of jobs available,” she said.
“To the extent that the post-pandemic world is indeed different from the pre-pandemic one, a robust recovery and expansion can smooth the transition.”
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Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.
Jennifer Duke is an economics correspondent for The Sydney Morning Herald and The Age, based at Parliament House in Canberra.