Strong momentum in the labour market and ongoing risks of higher inflation have resulted in ANZ bringing forward its initial cash rate forecasts, driven by the belief that the RBA will not be comfortable with policy simply getting to 'neutral' by the end of the year.
The big-four bank anticipates the RBA will deliver four more successive 50 basis point rate hikes in August, September, October and November, resulting in 200 basis points of additional tightening.
This will see the cash rate target reach 3.35% by November - two percentage points higher than it is currently.
If a mortgage rate went from 3.00% p.a. to 5.00% p.a. on a 30-year term it would add $708 to the monthly repayment on the average home loan size.
The RBA itself estimates 200 basis points in rate rises could sink home prices up to 15%.
ANZ Head of Australian Economics David Plank said there is a significant chance the RBA could opt to move by more than 50 basis points at one or more of its upcoming meetings.
"75 basis points, say, or even 65 basis points to 'round' the cash rate target to the nearest 0.25%," Mr Plank said.
"We would view this as a bring forward rather than implying a higher terminal rate.
"At this stage our thinking is that the cash rate will need to remain at this restrictive setting for an extended period, but we are conscious the downside risks to the economic outlook will increase with such a rapid move to a restrictive setting."
The US Federal Reserve has already moved to a restrictive setting to combat an annual inflation rate of 9.1% - the highest since November 1981.
Mr Plank notes the faster move to a restrictive rate setting by the RBA will bring forward the point to which the economy slows below trend.
"It also suggests house prices will fall by more than the 15%, but it doesn’t necessarily mean a hard landing for the economy," he said.
"A cash rate of 3.35% implies that household interest payments as a percentage of household income peak below the level reached in 2008."
ANZ Research has brought forward its expectation the RBA will lift rates above 3% to late 2022. This reflects the momentum in the labour market and the upside risks to inflation. Most likely delivered by a series of 50bp hikes, but larger can't be ruled out.
— David Plank (@DavidPlank12) July 18, 2022
CommBank joins ANZ in revising cash rate forecast
CommBank was less bullish than ANZ, having revised its cash rate expectations to 2.60% citing labour market strength and a co-ordinated response of central banks globally to raise policy rates quickly.
CBA Head of Australian Economics Gareth Aird said despite the change in call for the cash rate to lift from 2.10% to 2.60% by years end, CBA's overall messaging remains unchanged.
"RBA hikes will be powerful and slow momentum in the economy considerably," Mr Aird said.
"The impact on households with a mortgage will be very significant given the percentage change in the mortgage rate will be incredibly large.
"Some households with a mortgage will be insulated, at least initially, if they are on a fixed rate loan, but the majority of borrowers are on floating rate loans and the interest cost on their debt will go up very quickly.
"(We expect) softer growth in consumer spending will follow and there is a clear risk that the volume of household consumption falls by late 2022."
To avoid continued hits to the back pocket from surging interest costs, experts are calling for homeowners to refinance now to avoid becoming a mortgage prisoner.
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