Australian borrowers face the biggest monthly interest rate rise in nearly 30 years – a super-sized increase of 75 basis points – as inflation worsens but it could be even bigger after Canada raised rates by a whole percentage point.
Deutsche Bank is expecting the Reserve Bank of Australia in August to hike the cash rate by 0.75 percentage points at the beginning of August, which would be the biggest monthly increase since 1994.
Should this prediction come true, a borrower with an average $600,000 mortgage would see their monthly repayments soar by $256 as cost of living pressures intensify.
This would be the fourth consecutive monthly rate rise since May, and would mean a $654 surge in monthly variable mortgage repayments in just three months as rates climb at the fastest pace in 28 years.
The lowest jobless rate in 48 years also increases the risk of a wage-price spiral, with Australian inflation tipped to surge at levels unseen since 1990.
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Australian borrowers face the biggest monthly interest rate rise in three decades as inflation worsens with unemployment now at a fresh 48-year low. Deutsche Bank is expecting the Reserve Bank in August to hike the cash rate by 0.75 percentage points, which would be the biggest monthly increase since 1994
Unemployment in June plunged to 3.5 per cent, down from an already low 3.9 per cent in May, with the jobless rate halving in just two years. Last month, 88,400 new jobs were created including 52,900 full-time roles, which took unemployment to the lowest level since August 1974.
A very low jobless rate adds to inflationary pressures as employers struggle to find staff, leading to businesses putting up their prices to reflect higher production costs.
Why a 0.75 percentage point rate rise is a big deal
A 0.75 percentage point interest rate rise in August would be the biggest monthly increase since December 1994
Canada has this week increased interest rates by one percentage point – taking the cash rate to 2.5 per cent, the same as New Zealand’s
Before latest rise, Canadian borrowers this year had endured 1.25 percentage points of increases – the same as Australia
Canadian interest rates went up by 0.25 per cent points in March, 0.5 percentage points in April, 0.5 percentage points in June and 1 percentage point in July to 2.5 per cent
Australian interest rates went up by 0.25 percentage points in May, 0.25 percentage points in June and by 0.5 percentage points in July to 1.35 per cent
New Zealand interest rates went up by 0.25 percentage points in October 2021, 0.25 percentage points in November, 0.25 percentage points in February, 0.5 percentage points in April, 0.5 percentage points in May and 0.5 percentage points in July to 2.5 per cent
The ANZ bank is expecting inflation data for the June quarter, due out on July 27, to show the consumer price index surging by 6.3 per cent – the fastest annual pace since 1990 and at a level well above the Reserve Bank’s 2 to 3 per cent target.
Phil O’Donaghoe, Deutsche Bank’s chief economist for Australia, said worsening inflation could see the RBA raise interest rates by 0.75 percentage points on August 2 as it worried about a strong labour market sparking a surge in wages.
‘One of the challenges, certainly for the Reserve Bank, is trying to prevent this kind of strength manifesting in wage growth that is inconsistent with the inflation target,’ he told Radio 2GB broadcaster Brooke Corte.
‘When there’s such strong demand for labour – for a couple of years, the border effectively being shut – the demand for skills is just so strong that as long as consumers are willing to pay, the temptation for businesses is just to increase wages and pass that on.
‘So the risk for the RBA is trying to manage this extremely strong economy without ending up with a wage-price spiral that threatens the medium-term sustainability of the inflation target.’
Mr O’Donaghoe’s prediction of a 75 basis point rise, if it came true, would be the biggest monthly increase since December 1994, when the cash rate rose be one whole percentage point.
Canada this week raised its cash rate by 100 basis points while New Zealand increased its cash rate by 50 basis points.
Both Commonwealth nations now have a cash rate of 2.5 per cent – a level well above’s Australia’s three-year high cash rate of 1.35 per cent.
Canada this week raised its cash rate by 100 basis points as the nation led by Prime Minister Justin Trudeau (pictured) grapples with 7.7 per cent inflation – the worst since 1983 when his father Pierre Trudeau was PM
A 75 basis point rise in August would take the RBA cash rate to 2.1 per cent – the highest level since May 2015.
But Mr O’Donaghoe said there was an outside chance the Reserve Bank of Australia would copy the Bank of Canada and opt for a 100 basis point increase in August – taking the cash rate to 2.35 per cent.
‘I can very easily replace Canada with Australia,’ he said.
‘Same sorts of factors are at play here.’
Before Canada’s latest July rate rise, borrowers there had already copped 1.25 percentage points of rate increases in 2022.
Australian borrowers in May, June and July have already copped 1.25 percentage points worth of rate rises – the steepest pace since 1994.
In a mirror of Canada, Australian interest rates have increased by 0.25 percentage points, followed by two 0.5 percentage point increases.
Australia’s June rise of 0.5 percentage points was already the steepest since February 2000 while the May increase of 0.25 percentage points was the first since November 2010.
New Zealand this week increased its cash rate by 50 basis points as Kiwis battle 6.9 per cent inflation – the worst since 1990 when Prime Minister Jacinda Ardern (pictured) was in primary school
Phil O’Donaghoe, Deutsche Bank’s chief economist for Australia, said worsening inflation could see the RBA raise interest rates by 0.75 percentage points in August as it worried about a strong labour market sparking a surge in wages (pictured is a Melbourne auction)
Three of Australia’s big four banks – Commonwealth, ANZ and NAB – are raising their variable rates on Friday, with Westpac to follow on July 20.
Australia’s headline inflation rate in the year to March of 5.1 per cent was already the steepest increase since 2001.
ANZ is expecting the June quarter figure to show a 6.3 per cent surge, which would be the steepest increase since 1990.
The bank is expecting Australia’s headline inflation rate to hit 7.4 per cent later this year, an even more severe prediction that Reserve Bank governor Philip Lowe’s forecast of 7 per cent inflation.
In a possible sign of things to come for Australia, Canada’s inflation rate of 7.7 per cent in May was the fastest increase since 1983, back when Prime Minister Justin Trudeau’s father Pierre Trudeau was PM.
New Zealand’s March quarter inflation rate of 6.9 per cent was the highest since 1990, back when Prime Minister Jacinda Ardern was still in primary school.
The American inflation rate of 9.1 per cent in June was the steepest since 1981.
While Australia’s unemployment was low in 1974, the Middle East oil crisis caused the jobless rate to climb, hitting 10.2 per cent by April 1983 after inflation reached 11.4 per cent during the March quarter of that year.
‘If we don’t stem these inflationary pressures in the short term, you end up five, 10 years down the track with less jobs,’ Mr O’Donaghoe said.
He said a 75 basis point RBA hike in August would send a message to ‘price and wage setters that the Reserve Bank is intolerant of inflation above target’.
A 100 basis point move, while possible, was less likely because the Reserve Bank in Australia met monthly compared with the Bank of Canada’s six-week gaps between meetings.
What a 0.75 percentage point rate rise in August would mean for YOU
$500,000: Up $231 from $2,215 to $2,428
$600,000: Up $256 from $2,658 to $2,914
$700,000: Up $298 from $3,101 to $3,399
$800,000: Up $341 from $3,544 to $3,885
$900,000: Up $383 from $3,987 to $4,370
$1,000,000: Up $426 from $4,430 to $4,856
Increases based on Deutsche Bank’s prediction of the Reserve Bank of Australia raising the cash rate in August by 0.75 percentage points from 1.35 per cent to 2.1 per cent, taking a Commonwealth Bank variable rate from 3.39 per cent to 4.14 per cent