Are borrowers in for more interest rate pain?

Borrowers should brace themselves for further rate hikes, including a fifth outsized cash rate increase in October, NAB’s current interest rate forecast shows.

Speaking at NAB’s commercial broker quarterly economic update webinar last week, chief economist Alan Oster (pictured above) gave an overview of the economy from a global and domestic perspective, including the bank’s forecasts for inflation, interest rates and economic growth.

Ongoing shutdowns in China, the Russia-Ukraine War, and the impacts of aggressive rate hikes in the US are among the current concerns from a global perspective. But closer to home, NAB data shows that, overall, the Australian economy is doing sufficiently well, and that businesses are passing on all their costs, Oster said.

The big four bank is forecasting headline inflation to move higher this year and doesn’t expect core inflation to return to 3% until early 2024.

“We expect to see core inflation (around 3.5% currently) up 6.25%...and headline inflation maybe 7.5%,” Oster said.

The RBA has already hiked the cash rate by 225-basis points this year, and NAB forecasts show a 50-basis point rise in October, followed by a 25-basis point hike in November.

As it takes at least 12 months for monetary policy to have an impact, after this point, Oster said he hoped the RBA would “sit and watch”.

“They (the RBA) know that October and November is when people have to start paying,” Oster said.

Oster acknowledged that when interest rates go up, there’s about a three-month lag before they hit consumers’ back pockets.

“If we keep our rates view, which shows a 50 [basis point rise] and another 20, [taking the cash rate to] 3.1%, that will take about $500 per month off the average consumer,” Oster said.

Based on average weekly earnings and a 4.5% pay rise, the consumer gets to “keep nothing,” he said.

Read next: Westpac last of big four banks to move on rates

Commonly referred to as the ‘fixed rate cliff’’, Oster acknowledged that a high portion of fixed rate loans were due to roll off in mid-2023. It’s then when borrowers will be feeling the pinch of moving from rates from below 2%, to significantly higher rates, he said.

Read next: NAB forecasts grey days for housing market

Over the second half of 2022, NAB expects rates and fear to slow momentum, with 2.7% GDP growth during 2022 (around 3.9% in year average terms).

During 2023, NAB is forecasting GDP growth of around 1.6% (1.7% in year-average terms) and unemployment of around 4% (currently 3.5%). Over 2024, the bank expects GDP growth of around 1.8% (1.7% in year-average terms), and an unemployment rate of 4.3%.

Wages growth (as measured by the ABS Wage Price Index, 2.6% over the year to June), is expected to reach around 3% by the end of 2022, peaking at 3.5% by the end of 2023.

Oster said NAB internal spending figures to September 10, showed hospitality performed strongly. Retail and consumption were not as strong as indicated by ABS figures, currently available to July 2022.

In the year to the June 2022 quarter, NAB average consumer spending figures showed the highest year-on-year increase in the administration services and support sector (includes travel agents), at 155.4%.

This was followed by transport, postal and warehousing (up 53.9%), arts and recreation services (up 19.3%), and accommodation and food services (up 16.7%). Retail trade was up 10.1%.

Overall business revenue inflows were up by around 10% on the same time last year, NAB data showed. Hospitality and administration services (includes travel agents) had significantly stronger business revenues year-on-year, and mining was also robust.

Oster said construction figures were holding up despite concerns around margins and profitability, manufacturing also fared well, and, as a leading indicator, wholesale was also in a good position. Retail had recently improved but was now back to the 2019 benchmark.

“It’s [generally] saying that there’s different speeds in different parts of the economy, particularly hospitality is good (we’re not sure about consumption data), but what we are sure of is the businesses are doing well,” Oster said.

Sectors that continued to struggle included health (elective surgery bans playing a part), education and, more recently, professional services and arts and recreation services. While mining and wholesale/retail outcomes were stronger, data showed confidence to be an issue.

The NAB survey showed soaring purchase costs, which Oster said were growing at 5% on a quarterly rate (20% annual rate). Prices were still very strong, and were not much lower in August, he said.

Oster said cost of goods were up 2.5%, indicating retail prices were also increasing around 2.5% per quarter.

Having asked 1,000 SMEs the best way to solve labour shortages, the highest percentage (53%) suggested increasing traineeships/apprenticeships, followed by increasing migrant intake (40%) and opening international borders (44%).