This week’s inflation print, which saw Australia’s consumer price index rise to 7.3% in the year to September, has prompted Australia’s bank economists to revise up their peak official cash rate (OCR) forecasts. In particular:
- ANZ increased its peak OCR to 3.85% by May 2023.
- Westpac and National Australia Bank forecast a 3.6% OCR by March 2023.
- CBA predicts a 3.1% OCR by December.
The bond market remains even more hawkish, tipping a peak OCR of around 4.2% by September 2023:
As we know, the Reserve Bank of Australia (RBA) has already delivered 2.5% of interest rate tightening since May, which has lifted the average discount variable mortgage rate to 5.95%:
In turn, average variable mortgage repayments have soared 34%, adding $750 in monthly repayments on a $500,000 variable rate mortgage:
The below table shows how much variable rate mortgage repayments would rise if the above interest rate forecasts were to come to fruition:
The key takeaways from these OCR forecasts are as follows:
- CBA’s 3.1% peak OCR would see variable mortgage repayments rise 41% above their pre-tightening level, adding $913 a month in repayments to a $500,000 mortgage.
- Westpac and NAB’s 3.6% peak OCR forecast would see variable mortgage repayments rise 48% above their pre-tightening level, adding $1,078 a month in repayments to a $500,000 mortgage.
- ANZ’s 3.85% peak OCR forecast would see variable mortgage repayments rise 52% above their pre-tightening level, adding $1,163 a month in repayments to a $500,000 mortgage.
- The bond market’s 4.2% peak OCR forecast would see variable mortgage repayments rise 57% above their pre-tightening level, adding $1,282 a month in repayments to a $500,000 mortgage.
Obviously, the higher the OCR goes, the more Australian house prices will fall and the bigger the drain on household consumption – the economy’s key growth driver.
Even the CBA’s below consensus OCR forecast would see variable mortgage rates rise to their highest level since April 2012 and, according to the RBA’s own modelling, would see house prices nationally fall by 22% in real terms peak-to-trough.
The OCR forecasts of the other major banks and the bond market are apocalyptic and would likely see Australia enter a nasty consumer-led recession.
