Westpac expecting three more interest rate rises and a 4.1 per cent Reserve Bank cash rate by May

Westpac has become the latest of the Big Four banks to now be expecting three more interest rate rises by May.

Chief economist Bill Evans has revised Westpac’s forecasts to have the Reserve Bank raising interest rates in March, April and May to an 11-year high of 4.1 per cent – adding another $283 to monthly repayments on an average $600,000 mortgage.

‘At 4.1 per cent, the cash rate will be in deeply contractionary territory and a pause will be appropriate,’ he said.

Three of Australia’s Big Four banks – Westpac, ANZ and NAB – are now expecting a 4.1 per cent cash rate by May, with the Commonwealth Bank still expecting a 3.85 per cent cash rate by that time.

The prevailing forecast would mean 12 consecutive rate rises in a year, setting a new Reserve Bank of Australia record for punitive monetary policy tightening to tackle the worst inflation in 32 years.

Westpac has become the latest of the Big Four banks to now be expecting three more interest rate rises by May (pictured is a Sydney branch)

Borrowers have already endured nine consecutive monthly interest rates rises since May 2022, that has taken the RBA cash rate to a 10-year high of 3.35 per cent, despite Governor Philip Lowe in 2021 suggesting no rate rises until 2024.

This has seen repayments on an average, $600,000 mortgage surge by 42 per cent to $3,284, up from $2,306, for a someone on a 30-year loan now servicing a Commonwealth Bank loan with a 5.17 per cent variable rate.

Little more nine months ago, this borrower was paying a 2.29 per cent variable rate when the RBA cash rate was still at a record-low of 0.1 per cent.

But three more rate rises would take a Commonwealth Bank standard variable rate to 5.92 per cent and see repayments climb to by another $283 to $3,567 – marking a 54.7 per cent increase in a year.

NAB chief economist Alan Oster last week suggested a 4.1 per cent cash rate, as he is predicting, would go close to pushing Australia into a recession, which would be the first sparked by rate rises since 1991.

‘We still don’t expect a technical recession in Australia – but with rates rising above 4 per cent, it is becoming more of a possibility,’ he said.

AMP Capital chief economist Shane Oliver has said a 4.1 per cent cash rate would cause a recession, defined as two consecutive quarters of economic contraction. 

‘I do think a 4 per cent plus cash rate would probably knock the economy into recession or come very close to it,’ he told Daily Mail Australia.

Inflation last year soared by 7.8 per cent, the most severe increase since 1990 that is also well beyond the RBA’s 2 to 3 per cent target. 

Three of Australia’s Big Four banks – Westpac, ANZ and NAB – are now expecting a 4.1 per cent cash rate by May, with the Commonwealth Bank still expecting a 3.85 per cent cash rate by May (pictured is Reserve Bank of Australia Governor Philip Lowe with the RBA’s Assistant Governor on Economics Luci Ellis)

Mr Evans said a rate cut by the end of March next year was possible, provided Covid supply constraints eased.

‘Further out the next move is likely to be a rate cut beginning in the March quarter 2024,’ he said.

Australian wages last year grew by 3.3 per cent, the fastest pace in a decade, and Westpac is expecting pay growth of 4 per cent in 2023 (pictured is a Sydney construction worker)

‘But risks to this scenario are to the upside – Covid legacy factors that could boost demand and slow the disinflation process.’

Australian wages last year grew by 3.3 per cent, the fastest pace in a decade, and Westpac is expecting pay growth of 4 per cent in 2023.

But lagging well behind inflation, workers have also suffered a record cut in real wages.

This was despite unemployment, at the end of 2022, remaining at a 48-year low of 3.5 per cent and rising slightly in January to 3.7 per cent.

Mr Evans said the wage price index for the March quarter, due out on May 17, was likely to show signs of easing pay pressures, giving the RBA a case to stop raising rates by then as the economy started to slow.

‘By the time of the June meeting, we expect that there will be credible evidence that demand is slowing; labour markets are easing; and risks of a wage/price spiral have receded,’ he said.

‘While we expect the economy to stagnate in the second half of 2023 there will not be sufficient progress in bringing inflation into line with the target before the end of 2023 to accommodate earlier rate cuts.’