The RBA will decide this week whether to raise mortgage bills for millions of Australian families again, or deliver a June reprieve and pause interest rates to check the economic temperature.
In one scenario, another $78 will be added to monthly repayments on a typical $500,000, 25-year home loan – piling new-found pressure onto already stretched household budgets nationwide.
But if the RBA pauses, repayments won’t change, though the more than $1200 added to loan repayments since May 2022 is still hurting.
Which way the central bank moves in June is currently on a “razor’s edge” according to Oxford Australia’s head of macroeconomic forecasting Sean Langcake, who predicts a 0.25 percentage point rise.
He said the decision “isn’t clear cut”, with the potential for the RBA to be swayed by a decision by the Fair Work Commission (FWC) on Friday to lift the minimum wage 5.75 per cent from July 1.
“It wouldn’t take too much to tip them either way,” Mr Langcake said.
As things stand the major banks are split on whether the RBA will hike again or pause in June.
On Friday, ANZ Bank revised its peak rate forecast from 4.1 per cent to 4.35 per cent, predicting that the RBA will raise its cash rate target this week and then again in August amid inflation fears.
“The inflation ‘challenge’ in Australia is not the pace of wages growth, but the weakness in productivity growth that has pushed up unit labour costs,” ANZ’s head of Australian economics Adam Boyton said.
Commonwealth Bank, meanwhile, reiterated its prediction on Friday that the RBA won’t pass on another rate hike this year, saying the minimum wage rise is in line with central bank forecasts.
“We believe the domestic economy is now showing sufficient signs of slowing and we expect the RBA board will judge that leaving the cash rate on hold is the appropriate policy,” CBA chief economist Gareth Aird said.
Two futures for home owners
The big bank forecasts point to two very different futures for families with mortgage repayments.
If ANZ is right then RateCity research director Sally Tindall predicts some borrowers are facing rates with a “seven” in front of them.
“That’s not something many Australians would have thought possible even just a few months ago,” she said on Friday.
“But it’s a reality we could soon face before winter’s out.”
On the other hand, if Commonwealth Bank is right then home owners won’t need to pay any more, though the effects of prior rate hikes are still flowing through to household budgets.
Either way, Ms Tindall said it pays to prepare for the worst, urging Australians to call their bank.
“Call your bank and ask what your monthly repayment would be if the cash rate hits 4.35 per cent,” she said.
Productivity, wages key
As explained previously, the outlook for wages growth and productivity will be key in deciding whether rates go up again in coming months, with RBA governor Philip Lowe saying this week that productivity will need to lift for inflation to return back to central bank targets by mid-2025.
Basically, the view is that the current trajectory of rising wages growth is consistent with inflation falling back to between 2 and 3 per cent annually over the next two years, so long as productivity growth returns to levels seen before the pandemic.
But if that doesn’t happen, the RBA is concerned too much of the wages growth will feed back into higher prices, forcing them to compensate with higher interest rates to depress demand.
“It is difficult, in our view, to see productivity growth over the next year or two returning to the roughly 1 per cent page that appears to underlie the RBA’s medium-term forecasts,” Mr Boyton said.
“Indeed, the strength in hours worked evident in recent months implies that the level of productivity come the June quarter 2023 will be solidly below the level of a year ago.”