The bond market has become even more hawkish on Australian interest rates, now tipping the Reserve Bank of Australia (RBA) to hike the official cash rate (OCR) to 4.25% by October 2023, with rates to remain at this high level into 2024:
Bond market revises up interest rate projections.
Australia’s current OCR is 2.60% and the average discount variable mortgage rate is 5.95%. So, if the bond market’s 4.25% peak OCR projection came to fruition, it would see the average discount variable mortgage rates climb to 7.60%, which is 4.15% above the level in April 2022 immediately before the RBA’s first rate hike:
Bond market tips highest mortgage rates since the GFC.
That would be the highest discount variable mortgage rate since October 2008, which was immediately followed with deep rate cuts from the RBA.
The impacts on mortgage holders and the Australian housing market from the bond market’s hawkish OCR forecast would be devastating. As illustrated in the next table, a peak OCR of 4.25% implies an increase in average mortgage repayments of 58% from their pre-tightening level, or $1,300 a month in extra repayments on a $500,000 mortgage:
By October 2023, hundreds of billions of dollars worth of fixed rate mortgages taken out at rock bottom rates of around 2% during the pandemic will also have expired, thereby plunging these borrowers into extreme mortgage stress as well.
If anybody thinks that the bond market’s hawkish OCR forecasts could arrive without a major house price collapse and devastating recession, they need their head read.
The RBA would do well to look at the bond market’s OCR forecasts, laugh, and then move on. They are pure lunacy.
