Goldman Sach’s Australian chief economist, Andrew Boak, has forecast that the Reserve Bank of Australia (RBA) will lift the official cash rate (OCR) another five times over the next six months, taking the OCR to a peak of 4.10% by May 2023.
“We do not expect the RBA will risk falling too far behind a synchronised global tightening cycle”, Boak said.
“All considered, we now expect plus 25 basis point rate hikes each month to May 2023 (inclusive) – to a terminal rate of 4.1% (prior: 3.6%) – followed by 110 basis points of easing over 2024 to 3%”.
If Boak’s OCR forecast came to fruition, the RBA will have lifted rates by 4.0% in only 13 months – an extraordinary amount of tightening in a very short period of time.
It would also mean that Australia’s average discount mortgage rate will have more than doubled from 3.45% in April 2022 to 7.45% in May 2023, taking it to its highest level since October 2008:
Goldman: variable mortgage rates to climb to nearly 7.5%.
The impact on mortgage holders would be devastating. As illustrated in the next table, average variable mortgage repayments would soar 56% above their pre-tightening level, adding around $1,250 a month in extra mortgage repayments on a $500,000 mortgage:
It is also worth pointing out that there is a huge chunk of Australian borrowers that took out cheap (circa 2%) fixed rate mortgages over the pandemic which are yet to be impacted by the RBA’s cumulative rate rises:
Cheap fixed rate mortgages boomed over the pandemic.
Many of these fixed rate mortgages will expire in 2023 and would be reset at more than triple their pandemic level under Goldman’s forecasts. In turn, many borrowers’ household disposable income will be slashed as they are plunged into extreme mortgage stress.
The pending fixed rate mortgage reset means there is already significant monetary tightening in the pipeline even without further rate hikes from the RBA.
Goldman’s 4.10% OCR forecast is, therefore, a ‘bridge too far’ and would likely crash both the housing market and the economy, plunging Australia into a nasty recession.
