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Reserve Bank of Australia on track for biggest rate hike in history after Bullock says household borrowers well-positioned

Recent remarks from Reserve Bank of Australia (RBA) deputy governor Michele Bullock have heightened expectations of an acceleration in interest rate hikes.  

In a speech delivered on Tuesday in Brisbane Bullock expressed confidence in the ability of Australian home loan borrowers to weather further hikes to interest rates.  

According to Bullock around half of all owner-occupiers in Australia who have taken out variable-rate loans have made sufficient prepayments for nearly two more years of repayments on their debt. 

Australian households also increased their savings by around $260 billion during the pandemic, while tighter conditions on lending mean that new borrowers are better positioned to make their mortgage repayments.  

Research from the RBA has found that a third of borrowers with variable rate mortgages are already making repayments to satisfy a three percentage-point rise in interest rates. 

“These payments buffers help to protect against the risk that, as interest rates rise, households will find themselves unable to meet debt repayments,” Bullock said in Brisbane on Tuesday.  

Bullock’s sentiments are in line with some of the findings of a recent report from ratings agency S&P Global. According to the report the percentage of Australia mortgage-borrowers who had fallen into arrears dropped to historic lows during the pandemic, on the back of record-low interest rates intended to keep the national economy afloat.  

Confidence in the ability of Australia households to make their mortgage repayments gives greater room for the RBA to press ahead with further hikes to the target interest rate.  

On the same day that Bullock delivered her speech one of Australia’s biggest banks significantly raised its forecasts for gains in the official cash rate – the RBA’s risk-free benchmark interest rate.  

ANZ Bank now expects the RBA’s cash rate to rise to 3.35% by November 2022, as compared to the historic low of 0.1% it tapped throughout the course of the pandemic.  

David Plank, ANZ Bank’s head of Australian economics, expects the increases to arrive in the form of four consecutive months of rate hikes from the RBA.  

“Our expectation is that the RBA will deliver this via four more successive 50 basis point rate hikes in August, September, October and November,” Plank said.  

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

ANZ’s updated forecast is consistent with the expectations of the futures market, which sees the cash rate hitting 3.3% by December, before peaking at 3.5% in March 2023. If these forecasts prove correct, the rate of increase in Australia’s benchmark interest rate will be the largest in its history.  

The RBA’s target cash rate currently stands at 1.35%, following consecutive increases at each of its past three meetings.  

Robust gains in the RBA’s target rate could boost the fortunes of the Aussie dollar, by raising yields for assets denominated in the currency.  

This support could be especially strong vis-a-vis currencies whose monetary authorities or central banks have refrained from pursuing similar rate hikes, such as the Bank of Japan (BOJ).