Rising interest rates rocked the Commonwealth Bank

Commonwealth Bank experts expect interest rates to hit 2.60% by the end of the year, which they fear may be too high for some households.

They say the RBA’s measures could cause some Australian families to cut spending more than expected.

On Tuesday, Reserve Bank of Australia (RBA) Governor Philip Lowe reiterated the need for higher interest rates amid very low unemployment and inflation.

The Australian interest rate stands at 1.35% after starting the year at just 0.10%.

Following Lowe’s speech, CBA pundits confirmed their forecast of back-to-back 50 basis point hikes in August and September, before a pause in October and another 25 basis point hike in November, taking the rate to cash at 2.60%.

Lowe said he remained convinced of a “neutral rate” of 2.50%, meaning it would neither stimulate nor hinder economic spending.

However, ABC senior economist Belinda Allen said the Bank believes the neutral rate is closer to 1.50% and a terminal cash rate of 2.60% would be restrictive.

This week, RBA Deputy Governor Michelle Bullock delivered a speech predicting the potential impact of a 300 basis point increase in the variable mortgage rate, reflecting changes already underway in the market and by the RBA. .

In this scenario, the RBA estimates that just under 30% of variable rate borrowers would see their mortgage repayments increase by 40% or more.

It also predicts that half of fixed-rate borrowers would see their repayments increase by more than 40% when their fixed-rate schedule expires, and 25% of borrowers who switch around mid-2023 would see an increase of $1,000 or more. more than their monthly payment. refunds.

“These numbers suggest to us that market prices for the cash rate path are too high. We favor a shallower hiking cycle,” the ABC experts said in a research update.

They said that while the average borrower would be able to repay their home loan, others, such as those who borrowed recently or with higher leverage, will have to “dramatically reduce their spending.”

“A withdrawal of these marginal borrowers is in our view enough to see the economy slow down,” the research update said.

While interest rates are expected to continue to rise, Ms Bullock said the RBA will be watching closely how households react to the combination of rising interest rates and cost of living pressures.

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