Cash rate to rise in June, peak at 2% in mid-2023: Westpac

Economists at Westpac brought forward their interest rate hike expectations this week, following a surprise shift in messaging by the Reserve Bank of Australia at its most recent policy meeting.

The major bank now expects the tightening cycle to commence in June with a 15 basis point increase. Its forecasts also point to a further four cuts in 2022, leaving the cash rate at 1.25% by year’s end.

“The Reserve Bank Governor surprised us on Tuesday with the Board’s decision to abandon its patient approach to monetary policy,” said Westpac chief economist Bill Evans.

“Since the last Board meeting, when “patience” was emphasised, we have seen a further drop in the unemployment rate, from 4.2% to 4.0%, and a continuing surge in job vacancies pointing to further falls in the unemployment rate through the rest of 2022.”

Westpac now expects unemployment to reach 3.25% by the end of the year (compared to 3.75% forecast previously), which would generate the wages growth needed to satisfy the RBA’s conditions for a rate hike.

Westpac rate hike predictions

How will higher interest rates impact your home loan? 

Westpac’s previous forecasts had the cash rate peaking at 1.75% in February 2024. It has now pencilled in a terminal rate of 2.00% by mid-2023.

“This 2.0% will nevertheless result in a significantly higher debt servicing ratio for the household sector than in the 2009-10 tightening cycle,” said Evans.

Indeed, a cash rate of 2.00% would lift the average variable rate (OO, P&I) among lenders we track from 3.03% p.a. to 4.93% p.a., assuming variable rates rise at the same pace.

On a $500,000 mortgage taken out over 25 years, that would mean an additional $524 in monthly repayments, or around $6,284 extra paid over a year. 

But Evans said the billions in excess savings accumulated by households and businesses over the pandemic period will help cushion the impact of any interest rate hikes.

“The federal government alone allocated around $330bn to supporting the economy through COVID. There has been a massive transfer from the government balance sheet to the balance sheets of households and business,” he said.

At the same time, Evans acknowledged that some borrower types are more vulnerable than others.

“Consider for example the wave of fixed rate borrowers that took out 2% loans during the pandemic – this group is set to roll onto mortgage rates more than double their original rate over the course of 2023 and 2024.”

Home loan rate rise calculator

To see how much your repayments could increase if rates go up, try our rate change calculator. And for an idea of where interest rates currently sit, visit our home loan comparison page or browse the selection below.