If financial market predictions are right, the cost of mortgage servicing could hit record levels, senior economist says
Financial markets are pricing in a housing crunch, an expert at Commonwealth Bank warns.
Australia’s largest mortgage lender said that if the markets are right and the Reserve Bank is set to raise interest rates to around 2.5% over the next 15 months, it will push the cost of servicing a mortgage to record levels, MarketWatch reported.
Gareth Aird, head of Australian economics at CBA, doesn’t think it will go that far. Aird noted that the RBA says it’s only planning to raise the cash rate to a peak of 1.25%.
“It is possible, however, that the RBA takes policy into contractionary territory, either intentionally to put downward pressure on inflation or inadvertently if the RBA’s assessment of the neutral is higher than ours,” Aird told MarketWatch.
CBA research found that a cash rate of 2.5% would be “deeply contractionary,” resulting in mortgage repayments as a share of household income hitting a record high, Aird said.
While CBA is betting that rates won’t rise so precipitously, financial markets are forecasting that the central bank will hike the cash rate to 2.5% by June 2023. The markets predict that the cash rate will hit a peak of 3% over the next two years, MarketWatch reported.
The RBA has been skittish about hiking the cash rate from its current record low of 0.01%, but has admitted an early hike might come as inflation continues to bite. RBA Governor Philip Lowe recently walked back his earlier contention that rates wouldn’t rise until 2024, saying a rate hike this year is “plausible.”
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There is a strong feeling among economists that the RBA will raise rates in the middle of this year if the next set of inflation and wage figures show a jump in consumer prices, according to MarketWatch.
Aird told the publication that the government’s budget for the year to June 30, 2023, set to be released Tuesday, will help determine how soon and by how much the central bank hikes the cash rate. If fiscal settings remain too loose, it’s likely that the RBA will need to work harder over time to keep inflation in check, Aird said.
“Looser fiscal policy than we currently anticipate increases the probability that the RBA will take the cash rate to a contractionary setting,” Aird told MarketWatch.
