A Commonwealth Bank decision to protect its customers during the COVID-19 pandemic could deliver a steep rise in monthly mortgage repayments just in time for Christmas.
In May 2020, CBA said it would cut home loan repayments to the minimum amount for up to 730,000 customers with variable interest rates who paid by direct debit, saving them $149 a month, which the nation’s largest lender said people could use to pay bills during a “fraught” period.
The move, which CBA was the only major lender to make, was estimated to free up to $3.6 billion for the broader economy.
Gareth Aird, CBA’s head of Australian economics, said an incredible level of monetary policy tightening was yet to hit the real economy and would ultimately force the Reserve Bank to start cutting the cash rate again next year, The Sydney Morning Herald reported.
Two years after the CBA move was implemented, lags of up to several months between RBA rate hikes and increases in CBA customers’ minimum payments mean many home loan borrowers felt the impact of the central bank’s May rate rise only this month – a delay, which Aird said would probably have a macroeconomic impact.
“There is a lag between changes in the cash rate and the impact it has on monthly cash flow for borrowers on a floating rate mortgage,” Aird told SMH. “At CBA, for example, by December the impact of already announced rate rises on monthly cash flow for mortgage holders on variable rate loans will be a four-fold increase compared to July. As such, there is a strong case to slow the pace of rate rises given we expect consumption growth to slow significantly as the lagged impact of rate hikes impacts many households.”
Financial markets expect the OCR to peak at 3.6% by March and then decline by Christmas 2023.
Between now and March, the RBA board has six meetings and to hit 3.6%, it would have to raise the cash rate by half a percentage point at one meeting and then a quarter percentage point at the other meetings. These would be the fastest, and most aggressive, interest rate hikes since before the 1990-91 recession, when the bank had interest rates at 17.5%, SMH said.
Aird, one of the first economists to predict a tightening in monetary policy to start in 2022, expected the RBA – which has lifted rates by half a percentage point at its last three meetings – to slow its increases to a quarter of a percentage point.
He predicted the OCR to peak at 2.6% before the RBA cut it in the second half of next year, forecasting a combined half-percentage-point reduction in the cash rate at that time.
NAB data suggested that the combination of higher interest rates and inflation is starting to bite.
Its measure of financial hardship showed a 35% rise in the proportion of Australians struggling with the cost of living in the June quarter, compared to the survey-low of 29% in the March quarter.
Hardship was most widespread in Western Australia, at 43%, while inflation in Perth was at a nation-high of 7.4%. The biggest increase in hardship was seen in NSW and ACT, where it soared from 26% to 38%.
Rachel Slade, NAB’s personal banking group executive, said that while most of the bank’s customers were in a good financial position, pockets of concern remain.
“Seventy per cent of NAB customers are ahead on their home loan payments, but we do know there are some people who are feeling the pressure of an increased cost of living,” Slade told SMH.
