This article is from the Australian Property Journal archive
AUSTRALIAN homeowners need to embrace for higher mortgage costs with NAB economists warning the Reserve Bank of Australia will lift the official interest rate three times in the next three months to 4.1%, while consumer confidence has hit new lows in the face of cost-of-living pressures.
A note from NAB economists said the major lender now sees the RBA lifting rates from 3.35% currently to a peak of 4.1% in May, including 25 basis point increases at each of the next three meetings.
NAB had previously tipped a peak of 3.6% in this current cycle, but has upped its forecast following the RBA’s unexpectedly “hawkish” comments last week, when it suggested more rate rises were on the way.
“Taken together, last week’s post-meeting statement and the SoMP project a more hawkish approach by the RBA than suggested by their communication in December. The statement emphasises that the ‘board’s priority is to return inflation to target’ (unchanged) and that the board ‘expect further increases in interest rates will be needed over the months ahead’,” the note said.
“Importantly, the RBA’s updated set of forecasts revised up the inflation track in the near-term and the bank continues to see inflation only declining to the top of the 2-3% band by mid-2025.”
Inflation hit 7.8% in December.
According to RateCity, the average mortgage holder could end up paying a total of $1,135 extra in monthly repayments since the start of the hikes, if NAB’s new cash rate forecast is realised. The average variable borrower with a $500,000 debt at the start of the hikes could see their repayments rise by an extra $227 per month in the next three months, and a total of $1,135 extra per month since the start of the hikes – a 49% increase in just over a year.
NAB economists noted the RBA’s GDP forecasts see growth of 1.5% over each of the next two years and while unemployment is expected to rise, wage growth is now forecast to peak above 4%.
“Based on the RBA’s forecasts – which are conditioned on a cash rate peak of around 3.75% in early 2023 and an easing from early 2024 – it is likely they see scope to take rates higher and return inflation to target more quickly, particularly given the risk to domestic inflationary pressure remains to the upside.”
NAB now expects consumption growth to slow sharply as 2023 progresses and likely fall slightly in real terms in the back end of the year. This will weigh on GDP growth, alongside a weaker outlook for both dwelling and business investment.
The NAB economists said that while it is likely that headline inflation has peaked, a significant unknown for 2023 is how quickly inflation moderates.
“In our view, a strong case remains for the RBA to pause or slow down the current hiking cycle soon to allow time for the rapid adjustments made over the past year to flow through.
“Such an approach would leave open the possibility of raising rates further later in the year if inflation did not moderate sufficiently. However, given the board’s recent statements, its continuing reactiveness to recent inflation data and our expectations for the near-term data flow, we judge it to be unlikely the board will feel comfortable pausing before May – and indeed there remains a possibility that rates rise further.”
Consumer confidence down
NAB internal transaction data suggests that nominal retail sales rose by 2.0% in January, and broader household consumption rose by a similar amount.
However, the latest ANZ-Roy Morgan Australian Consumer Confidence measure dropped 5.5 points last week to 78.1 after a 3.2-point fall the week before, and now sits at its lowest level since early April 2020, at the beginning of the COVID pandemic. Confidence declined across all five mainland states for a second week in a row.
Four of the five confidence subindices were down. “Current financial conditions” fell 4.9 points to just above its record low in late March of 2020. “Future financial conditions” dropped, “current economic conditions” plunged 9.3 for a third straight weekly decline. “Future economic conditions” bucked the trend with a small rise, while “time to buy a major household item” dropped 11 points.
Meanwhile, with NAB’s January Business Survey showed business conditions rebounding with a strong monthly readin. Most of the survey’s indicators increased, and confidence rallied back above its long-run average for the first time since August last year. Cost and price growth indicators picked up after a sharp fall in the last report, however they indicators remain well below their July peak.
