Westpac expects interest rates to hit 3.85% by May

Westpac made a surprise call on interest rates – lowering its forecast that the cash rate will be raised to 4.1%.

Instead, the big bank predicted interest rates will peak at 3.85% and the Reserve Bank of Australia (RBA) will even pause any rate hikes in April.

However, Westpac chief economist Bill Evans predicted that interest rates would be raised for the last time this year in May to 3.85%.

He noted that the RBA governor flip-flopped after the March board meeting and only “tentatively” signaled the possibility of a rate hike.

Despite a stronger than expected unemployment rate – an increase in employment of 64,600 jobs and a drop in the unemployment rate from 3.7% to 3.5% – Mr Evans added that wage growth was still weak.

But the main change since the RBA board meeting in March has been unfavorable developments in global markets as Silicon Valley Bank collapsed, raising fears of contagion, he said.

“The most realistic risk scenario for the U.S. economy involves a credit crunch for regional banks – typically those with assets below $250 billion…As markets, regulators and rating agencies restrict the ability of these small banks to support small and medium-sized businesses and small businesses – about 50% of total market coverage – a new drag will emerge for the US economy,” he explained.

“It is also likely to undermine confidence and raise questions about the stability of the global banking system. Hot markets highlight the uncertainty surrounding

this scenario.

He predicted that the RBA will be forced to stop raising interest rates from June as economic conditions deteriorate and does not expect further interest rate hikes for 2023.

“At the time of the June meeting, with the cash rate deep in contraction territory, the economy slowing at a faster pace and evidence from the March quarter wage price index that the growth trajectory of wages remains subdued, it will be appropriate to delay any further tightening until the next quarterly inflation report, released ahead of the August board meeting,” he added.

“We expect that by August, the case for an even deeper push in the cash rate into contractionary territory will be weak as the economic slowdown takes hold and we begin

see real progress in reducing inflation, especially if global credit issues continue to impact growth and markets.

Interest rates have soared from a record low of 0.1% to 3.6% since last May.

Mr Evans also argued that interest rates would start falling again from the second quarter of next year between March and May.

“These include a drop in the inflation rate below 4%, policy deep in contraction territory – we consider the neutral cash rate to be around 2.75 to 3%, the economy is stagnating in the second half of 2023 and the prospect of continued weakness in the first half of 2024; the unemployment rate is heading towards 5% by the end of 2024; and wage growth is slowing from a peak of 4% in 2023.”

The predictions come as warnings have been issued that Australians could fall into the trap of becoming a home loan hostage – a term coined to describe customers who may be unaware that simple life decisions could impact their ability to refinance their mortgage with a new lender.

This is different from a mortgage prisoner who doesn’t have the ability to refinance because they can’t meet current borrowing rules or don’t have enough equity in their home.

Instead, new research has found that common life decisions Australians are currently considering could put borrowers at risk, including planning to change jobs (19%), have a child (8%) and get a home. new credit card, personal loan or car loan. (18 percent).

“Home loan customers may not know that when they go to refinance their home loan with a new lender, they are being assessed as if they were a new borrower, taking into account their financial situation beyond their history of repayment and their loan-to-value ratio,” said Kylie Moss, Mozo Director.

“The main difference between a hostage home loan and a mortgage prisoner is that a hostage may temporarily find it difficult to refinance. While a prisoner is someone who is facing extreme financial hardship and is unable to refinance their mortgage and may have to default on their repayments, seek financial hardship or sell their property.

Mozo’s research also found that three in eight borrowers are unaware that lenders apply a 3% service buffer to the home loan rate at the time of application, which takes into account a borrower’s ability to make face higher home loan repayments if rates rise.

For example, a borrower requesting refinancing at the average variable rate of 5.85% would be assessed on their ability to make repayments at a rate of up to 8.85%.

On a $500,000 loan, this would mean the borrower would be assessed on their ability to repay $4,145 per month, rather than the $3,176 required at the current interest rate.

“Australians considering refinancing over the next year should plan for big life and financial decisions to avoid becoming a home loan hostage, as well as see if they can tighten their cash flow in the months leading up to the application. “said Ms. Moss.

Meanwhile, around one in ten Australian households are also cutting back on grocery shopping as cost of living pressures weigh, according to a recent survey by professional accountancy body CPA Australia.

While the majority of respondents said they were cutting back on luxuries such as vacations and gym memberships, it was concerning that people were cutting back on grocery spending, said Gavan Ord, senior director. business and investment policy of CPA Australia.

“People short on cash also forgo visits to the doctor and dentist, and 6% said they cut back on health and dental care to save money,” he said.

“Some are looking to save money by using their car less. An 8% report said it reduced car and transportation costs.

“After 10 consecutive interest rate hikes, we are now seeing Australians at different income levels being forced to cut costs where they can.

“This change in consumer behavior is shaking business confidence. Over the past three years, businesses have had to adapt to Covid-19, supply chain pressures, skills shortages and rising costs. They will now have to adapt to a more cost-conscious consumer to remain viable. »

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