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Economist Saul Eslake predicts Australia’s interest rate growth will slow

Economist Saul Eslake predicts Australia's interest rate growth will slow

There is a glimmer of hope for Australians fearing more interest rate pain, with a leading economist predicting the massive hikes could soon start to ease.

On August 2, the Reserve Bank of Australia raised interest rates for a fourth consecutive month, bringing them to a six-year high of 1.85 per cent.

It was also the third month in a row the cash rate rose by 0.5 per cent, the fastest interest rate growth Australia has experienced in almost 30 years.

The RBA has made it clear interest rates will continue to go up as it attempts to bring soaring inflation levels down.

But independent economist Saul Eslake, former Bank of America Merrill Lynch chief economist (Australia and New Zealand), believes interest rates will not rise as high as some are predicting.

“I think the Reserve Bank is of a mind to get it (interest rates) up to about 2.5 per cent by the end of the year. That could be either 2.35 per cent or 2.6 per cent,” he told NCA NewsWire.

“Then they will be able to pause to assess the impact of what they by then will have done.

“In my view, that may well be enough to slow the economy sufficiently.”

Mr Eslake said raising the cash rate to 2.35 or 2.6 per cent should be enough to achieve the RBA’s goal of slowing down the growth of domestic spending to counter inflation.

“As customers do have to start paying for the rate increases that have been announced, you should see spending slow quite a bit,” he said.

“The other part of the answer is that there is now starting to be some evidence to suggest that the global sources of inflationary pressure have peaked.”

Mr Eslake’s projection goes against what the country’s big four banks have previously predicted after they all unanimously forecast more pain for Australians.

NAB expected the cash rate to sit at 2.85 per cent by November, while Westpac forecasted it would rise to 3.35 per cent by February next year.

But Westpac’s forecast was not as dire as ANZ’s, who expected the cash rate to rise above three per cent before the Christmas holidays.

“Our expectation is that the RBA will deliver this via four more successive 50 basis point rate hikes in August, September, October and November,” ANZ’s head of Australian economics, David Plank, wrote in July.

“This 200 basis points of additional tightening sees the cash rate target at 3.35 per cent by November.”

The CBA forecasted the cash rate will sit at 2.60 percentage points by November.

Mr Eslake acknowledged and did not dismiss these projections, but expressed concern over what it could mean for the Australian economy.

“My view would be that if the Reserve Bank does end up going straight to 3 per cent or 3.5 per cent… there will be a much greater risk of a sharper slowdown in the Australian economy,” he said.

RBA Governor Philip Lowe has previously said he expects they will take further action on interest rates, but indicated those changes are not “pre-set” and subject to incoming data at the time.

“The Board expects to take further steps in the process of normalizing monetary conditions over the months ahead, but it is not on a pre-set path,” he said in a statement following the August hike.

“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 labor market.”

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CBA boss warns of ‘short sharp contraction’ headed for Australian economy

CBA boss warns of 'short sharp contraction' headed for Australian economy

The boss of Australia’s largest bank has warned that the economy is already declining and that a “short, sharp contraction” is on the way.

Late on Wednesday, the chief executive of the Commonwealth Bank of Australia, Matt Comyn, delivered the company’s annual results.

Although the CBA made an eye-watering $9.6 billion in profit over the last financial year, Mr Comyn warned that tougher times were on the horizon.

He told the Australian Financial Review that he predicted “a short, sharp contraction in the Australian economy.”

“We are definitely expecting a more challenging year ahead than we have seen in the last 12 months,” he added.

However, in some good news, the banking CEO believes a contraction is almost a certainty but a full-blown recession is less likely.

Australia is in the throes of an economic crisis as inflation rose to 6.1 per cent last month, the highest level it’s been for 20 years.

And for the first time in more than a decade, Australia’s central bank has had no choice but to increase the cash rate in a bid to stop rampant inflation.

For the last four consecutive months, the Reserve Bank of Australia has increased interest rates by 1.75 percentage points and Mr Comyn more rate increases will come.

Mr Comyn told the publication his bank predicts the cash rate to increase by another 75 basis points to sit at 2.6 per cent.

The cash rate is currently 1.85 per cent.

Once the cash rate hits 2.6 per cent, Mr Comyn said the economy would experience a contraction of 1.5 per cent.

He said he “hoped” that once the cash rate reached this point it would be enough to curb spending, adding “We need to see a slowdown in demand.”

Speaking to the ABC, Mr Comyn said “We do forecast recessions in the US, UK and Europe. We don’t believe that that’s the likely outcome in Australia.”

Already there are signs that Australians are splashing their cash less.

Mr Comyn said their customer data shows that spending is falling for both debit and credit cards.

This was significantly more for customers who had mortgages.

“It’s quite early post the immediate rate rises, [but] we are already seeing a downturn in spending across our customer base, both from a debt and credit perspective,” he said.

“Of course, that’s more pronounced with customers who have a home loan, and we expect that it will continue throughout the course of the calendar year.”

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Interest rates: Peter White urges borrowers to beware of the hidden dangers associated with refinancing following RBA rate rise

Interest rates: Peter White urges borrowers to beware of the hidden dangers associated with refinancing following RBA rate rise

A leading loans expert is urging mortgage holders to be wary of the hidden dangers associated with refinancing as the big four banks look to entice more customers with “cheap deals” following this month’s rate rise.

Peter White AM, the managing director of the Financial Brokers Association of Australia (FBAA), is asking Australians who are considering whether they should switch up their home loan to proceed with caution, warning that “cheaper isn’t always better”.

The director’s message comes after the Reserve Bank of Australia increased the cash rate by 50 basis points for the fourth time in as many months on Tuesday.

With the base rate now standing at 1.85 per cent, Mr White is asking borrowers to be on alert as major banks look to lure vulnerable customers who are struggling with their repayments to sign up to its services.

“Some banks at the moment are offering cheap variable rates to new borrowers only. This is a trap,” Mr White told news.com.au.

“For the lender it’s about using a marketing budget to generate more customers, knowing that most customers will stay as it costs to change again.”

It’s all part of a “vicious cycle” lenders use to draw customers into borrowing from them, Mr White explained, where new customers are blindsided as the rate on offer doesn’t always mean the customer will be better off in the long term.

“There is a hidden danger at times like this that is rarely spoken about,” Mr White said.

“Banks will be looking to attract those considering refinancing as new customers, and will offer cheaper variable interest rates that are significantly below their fixed rates, which are rapidly climbing. This is a case of ‘buyer beware’.”

Cashbacks and exclusive rates at discount prices for new customers are some of the lures banks are using to attract new borrowers.

Both come at the cost of disadvantaging the lender’s current customer base as their higher interest rates make up for the lower rate offered to new customers.

“Borrowers should be aware that next time around they will be the existing customer facing higher rates and will be disadvantaged during rate increases,” Mr White said.

“It’s an old game to lure new customers with a perceived advantage only to be taken advantage of with the next move.”

Additionally, some banks use a tactic where they attempt to give you a better rate after you’ve agreed to another offer.

“If they were serious about looking after you they would have offered this when you first approached them, so ignore this offer and don’t be distracted as this will cause you even more headaches, and makes the process even more complex,” he said .

While Mr White advises borrowers to refinance with caution, saving on your home loan isn’t entirely off the cards.

Rather than focusing on the big four banks, Mr White recommends looking at what second tier banks such as Suncorp, and non-banks such as Bluestone, have on offer.

“Going with the major banks is often the most expensive way forward and may not be in your best interests due to constraints and other factors specific to you,” Mr White said.

“Remember the big banks can only sell you their products, and their aim is to look after themselves and their shareholders, not to act in your best interests.”

It’s also advised that borrowers go through a mortgage broker, rather than directly through a bank. Brokers are free to use as they receive commission from lenders once they sign a customer up to a service.

They also have access to a range of offers that aren’t always available to borrowers who go through the back directly and can find a rate and repayment schedule that suits a borrower’s needs.

“A finance broker is obliged to act in your best interests and sometimes this means explaining that the best option may be not to refinance,” Mr White said. “(They’re also) charged by law to act in your best interests, whereas banks are not.”

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