RBA hikes could push mortgage rates to 7 per cent

John Edwards, a former member of the RBA and non-resident fellow at the Lowy Institute for International Policy, predicts that the RBA will want to reach an official interest rate of 3.5 per cent in two years. To achieve this, eight rate hikes of 25 basis points each are “distinctly possible” over 2018 and 2019, Mr Edwards said, adding that the cash rate hikes could start even earlier.

Mr Edwards’ hypothesis was informed by the assumption that the RBA thinks the current rate to be “exceptionally low” and that should the economy improve, as the central bank predicts, the next rate move will be up.

“[The RBA] would think of a sustainable or natural policy rate as at least 3.5 per cent and, most importantly, it will want the policy rate increase to match the forecast improvement in Australia’s economy performance, so it will want to be at 3.5 per cent (at least) by the end of 2019,” he said.

In line with the hikes, the average standard variable rate on home loans will rise from 5.3 per cent to 7 per cent or more, Mr Edwards forecast.

Writing for the Lowy Institute, Mr Edwards called the RBA’s current record low rate of 1.5 per cent “too low”, provided that: “inflation does indeed return to 2.5 per cent, as the bank now expects, if growth does indeed return to 3 per cent ‘within a few years’, as the minutes of the June board meeting predict, [and] if the world economy is indeed picking up”.

The increases, however, “will cause less distress than will be widely observed”, Mr Edwards added. The amount of interest paid on mortgages is “very much less” than six years ago despite large rises in mortgage debt.

He explained: “While debt has increased a bit, interest rates on the total of outstanding debt have fallen a lot. As a share of household disposable income, housing interest payments are now 7 per cent compared to 9.5 per cent in 2011, or 11 per cent at the peak of the RBA tightening episode before the 2008 financial crisis.

“If the standard variable mortgage rate peaked out at around 7 per cent that would still be nearly 1 percentage point below the 2011 level, and 2.5 percentage points below the 2008 peak.”

The RBA’s current 1.5 per cent rate has not moved since August 2016. In a finder.com.au survey leading up to the 6 June cash rate decision, 24 out of 30 experts predicted that should the rate move in the future, it would tick up. Most respondents expect that to happen in 2018, however four respondents could see a rate rise occurring between October and December this year.

The RBA will announce the official cash rate for July next Tuesday, 4 July, following its monthly board meeting.

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