ANZ is confident that the strong outlook for employment and wage growth moving forward will cushion the anticipated lift in interest rates.
26 April 2022
ANZ senior economist Adelaide Timbrel said the major bank expected wages to continue to accelerate through the impending cash rate hiking cycle, as they did during the 2002–08 cycle.
“Moreover, we expect that unemployment will continue to fall, reaching a five-decade low of 3.3% later this year.
“This means that some of the impact of higher interest payments and reduced borrowing capacity will be offset by higher household incomes as interest rates rise.”
Ms Timbrell explained that while higher interest rates had a negative impact on house prices, rate hikes did not always lower prices. For example, house prices rose by more than 50% during the tightening cycle of 2002-08, or an average of 8% year-on-year.
“While we don’t expect to see such a strong run of housing prices through the impending tightening cycle, we do expect the correction in housing prices to be a moderate one, especially when compared with the rapid housing price growth over the last two years,” she said.
High levels of household savings are also expected to lower the risk of forced selling as interest payments rise.
ANZ has predicted that the average share of household income that services interest will remain below the long-term average even as the cash rate hits 2%, which the bank expects will take place by the end of next year.
Another key distinguishing factor of the impending tightening cycle identified by ANZ is the introduction of stronger regulation that reduces financial stability risk.
“The current mortgage serviceability buffer requires prospective borrowers to prove that they can afford a mortgage at 3 ppt higher than the advertised rate,” explained Ms Timbrell.
“This equates to twelve 25 bp cash rate hikes and should reduce the risk of forced selling or financial instability as the cash rate rises.”
Notably, Ms Timbrell said that a small percentage point increase would have a greater impact on interest payments than seen previously, with owner-occupier variable mortgage rates poised to rise by 75% as the cash rate hits 2%.
“This may lead to a payment shock across some households. Though for most households, strong savings and wage growth should offset this for the most part,” she said.
Meanwhile, Westpac economists have matched NAB’s previous forecast, placing core inflation at 1.2% for the March quarter and 3.4% over the year.
If Westpac’s forecast is realised, the quarterly rise in core inflation will be the largest since the mining boom of 2008 as a direct result of broad spread price pressures. Meanwhile, the six-month annualised rate of core inflation is expected to accelerate from 3.5% to 4.4%.
In its latest bulletin, the big four bank said inflationary pressures continued to build due to ongoing supply disruptions, rising commodity and energy prices, and robust domestic demand.
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