Borrowers are braced for a wave of rate increases on home loans, credit cards and business credit for the rest of the year following the Reserve Bank’s radical shift to a hawkish stance on monetary policy.
The central bank surprised most economists with a 0.5 per cent hike of the cash rate following its June board meeting on Tuesday.
The latest official increase is the largest announced by the RBA in twenty years and boosts the target cash rate to 0.85 per cent.
Westpac last night said it will lift variable mortgage rates by 50 bps and was reviewing other rates, a lead likely to be broadly followed.
Leading economists last night were revising their cash rate forecasts following the RBA’s aggressive move and the change in rhetoric.
“The board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead,” governor Philip Lowe said.
“The size and timing of future interest rate increases will be guided by the incoming data and the board's assessment of the outlook for inflation and the labour market.
“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”
Commonwealth Bank chief economist Gareth Aird described the RBA’s commentary as a “radical shift of gear”.
“The size of the move blindsided most economists and financial market participants,” he observed in a report issued last night.
“The decision to hike by a larger than usual 50 basis points indicates the board has made the decision to front load the tightening cycle.”
Aird is now forecasting another 50 basis point hike next month followed by a string of 25 bps increases in August, September and November.
By the end of the year, Aird believes the cash rate will stand at 2.1 per cent, although he noted there was a risk it could hit 2.35 per cent if the board decides on a fatter hike in August.
Aird said the revisions to the cash rate forecasts would have implications for his outlook on growth and unemployment.
“We will downwardly revise our forecast profile for GDP in both 2022 and 2023,” he said.
“And we will upwardly revise our forecast profile for the unemployment rate in 2023.”
Deutsche Bank chief economist Phil O'Donaghoe has also revised his cash rate forecasts to include a 50 bps move in July followed by three monthly hikes of 25 bps.
He sees the cash rate climbing to 2.1 per cent by October.
“The sequence of front-loaded rate hikes we now expect will go a long way to address our previously-held concerns that the RBA was behind the curve,” he said.
“The hawkish tone in today's statement gives us added confidence that the RBA is also conscious of this risk, and it is a risk that we think will remain heavily influential at upcoming board meetings.”