IMF’s 7.1% rate forecast ‘not impossible’

In its latest overview of the Australian economy, the International Monetary Fund (IMF), which aims to ensure the stability of the global monetary system, predicts that Australia’s average mortgage lending rate will rise by 2 per cent in the next four years from 5.1 per cent to 7.1 per cent.

RateCity.com.au money editor Sally Tindall said that this rate would be equivalent to the Reserve Bank making eight 25 basis point rate hikes, which she said is “not impossible but highly unlikely”.

“There’s no question the RBA would like to lift rates,” Ms Tindall told Mortgage Business.

“They’ve indicated the new ‘neutral’ cash rate is 3.5 per cent, an increase of 2 per cent which mirrors the IMF projections. They just haven’t put a time frame on it because their plans are being held hostage by the economy.”

Ms Tindall noted that inflation is currently at 1.9 per cent, wages growth is at 2.1 per cent and economic growth at 2.4 per cent. If these figures continue to stall, she believes that the RBA will be “hard pressed” to find an opportunity to lift rates even once in 2018.

“A 2 per cent increase in the cash rate by 2022 — assuming there are no additional out-of-cycle rate hikes from the banks — would require significant increases in inflation, wages and GDP, which don’t seem to be on the horizon,” the money editor said.

“The RBA is also concerned with the record levels of household debt. Adding 2 percentage points to the average mortgage would probably break a lot of Australian households, despite the fact that lenders factor in a buffer of this magnitude to serviceability calculations.”

AMP Capital chief economist Shane Oliver expressed similar sentiments last week and warned that higher mortgage rates could push Australia into a recession.

“Taking the mortgage rate to 7.1 per cent would be akin to a 2.5 [per cent] to 3 per cent hike in mortgage rates that I suspect would cause significant delinquencies and defaults and knock the economy into recession,” Mr Oliver said.

“I suspect that they have not properly allowed for much higher levels of household debt compared to the last time interest rates rose in 2009–10.”

RateCity’s Sally Tindall said that if the IMF forecasts do come true, owner-occupiers will have to make higher repayments than they’ve been used to over the past 10 years.

During the past decade, owner-occupiers have paid an average of 6.52 per cent for a standard variable rate, 5.78 per cent for a discounted variable rate and 5.89 for a three-year fixed rate, according to the Australian Bureau of Statistics.

“But right now, owner-occupiers are paying 5.20 per cent for a standard variable rate, 4.50 per cent for a discounted variable rate and 4.15 for a three-year fixed rate,” Ms Tindall said.

“If we add 2 percentage points to those figures, you’d expect owner-occupiers to pay 7.20 per cent for a standard variable rate, 6.50 per cent for a discounted variable rate and 6.15 for a three-year fixed rate.

“If you took out a 30-year, $350,000 mortgage, and the discounted variable rate rose from 4.50 [per cent] to 6.50 per cent, your monthly repayments would climb by $439 and your total repayments would jump by $157,983.”

[Related: Low rates have led to mortgage ‘buffer’, says Treasurer]