Will the RBA hike the cash rate in July 2023? CBA, ANZ, NAB, and Westpac home loan predictions

The Reserve Bank of Australia hasn’t so much pivoted as reset expectations. Last month’s interest rate decision was expected to hold the line, but the central bank surprised by adding another 25 basis points to the official cash rate.

Now, the cash rate is at an eleven-year high of 4.10%. 

“This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe,” explained RBA governor Philip Lowe in the post-meeting statement. 

“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”

In the aftermath, Australia’s Big Four banks – CBA, ANZ, NAB, and Westpac – have readjusted their ideas of how high interest rates will go, and it’s not looking pretty for home loans. 

So what will the RBA decide in its 4 July meeting? Let’s analyse the rate forecasts.

The  RBA may have accidentally set the wrong tone by holding the cash rate in April. In doing so, many economists, bankers, and borrowers assumed a longer pause was in order. After all, inflation has been showing some meaningful signs of slowing. 

However, this may have given consumers the wrong impression and contributed to a worrying recovery in property prices. While housing values alone won’t worsen inflation, they still have the RBA’s attention as a spending indicator.

Lowe has made it clear the RBA wants to rein in inflation without losing economic progress, but if the trends don’t reverse soon, job losses and a recession might be inevitable. After all, it is the RBA’s mission to control inflation – no matter what.

“The RBA is very focused on getting inflation down,” explains Mozo banking expert Peter Marshall. “The only thing they can do about inflation is to raise interest rates. So if they think there’s a risk inflation is not reducing as quickly as they would like, they will hit the interest rate button.”

The RBA has softened its language around how high interest rates will go in every post-meeting statement, and pundits agree we may only have one or two more hikes left this year. But if that statement feels familiar to read, it is. Analysts have claimed we’re one or two hikes away from the rate peak for months now. The finishing line keeps moving out of reach. 

Indeed, there may not be a concrete finishing line: the goal is to control inflation. Housing affordability and consumer sentiment are not part of the RBA’s remit, so they’ll tighten monetary policy until they succeed – hell or high water.

All interest rate decisions this year have been close calls, if RBA meeting minutes are anything to go by. The Big Banks have been split prior to every announcement. Headed into next month, the predictions remain divided: according to the big banks, there’s a 75% chance the RBA will hike 0.25% in July. 

Big Four Bank cash rate predictions – 29 June 2023

After July remains a little murky, however. While all four Big Banks agree the cash rate will hit at least 4.35%, Westpac and NAB believe it will move beyond and settle at 4.60% by August. If this proves enough to stall inflation, the banks reckon the RBA will hold until late 2024 before making cuts. 

“I am not believing the ‘two more rate hikes’ story,” Marshall admits. “There are so many cracks appearing right now that indicate the economy is slowing/crashing. We’re more likely about to hit a recession, and that will see the rate increases stop.”

The warning signs? Marshall points out we’re seeing more home loan delinquencies and distressed sales making a loss, meaning affordability for Australia’s largest form of household debt – mortgages – is stretched to the max.

In fact, the cracks may be so patently obvious the RBA may not move in July at all, instead holding again to wait and see for August.

“The last meeting was a line ball call on whether they moved or stayed,” says Marshall. “With the lower monthly inflation figure and increasing unemployment, I think the RBA is getting its wishes, and the economy is coming to a halt.”

According to a survey Mozo conducted at the beginning of the year, only 27% of borrowers can afford another rate hike in July. Everyone else will face mortgage stress – or worse, become home loan hostages. 

So for those who’ve already tightened their belts, called their lenders, and reached into their savings, what options are left?

“It really depends on your financial situation,” says Marshall. “A lot of people will be able to refinance – the vast majority would. But there are also plenty of people who can’t, and they’re usually people who have borrowed more recently in the last few years.” 

According to Marshall, risk factors that can make it hard to refinance include:

• Having a high LVR. Customers who bought recently at a high loan-to-value ratio may not have built enough equity in their property to be eligible. Refinance home loans usually require a minimum of 80% LVR. 
• Reduced income or savings. If other expenses have eaten into your monthly income or savings, it narrows your repayment flexibility. Lenders like to see borrowers who have enough money to deal with fluctuations in interest rates. 
• Serviceability tests. When signing up for a home loan, banks assess potential borrowers on their ability to afford interest rates up to 3% higher than the one they’re applying for. Given how much rates have risen, this means you may have to qualify for rates as high as 9%. 

“So there are many reasons why not everyone can refinance, but the vast majority of mortgage holders who have lower LVRs can definitely refinance,” assures Marshall.

Cleaning up your finances can help give your refinance application the best chance of success. However, Marshall reminds customers it’s important to ensure they’re still on the best interest rate possible for their current lender.

“Banks have better discount rates for new borrowers than they do for the existing customers, usually. So make sure that the rate you’re on is competitive compared with those new borrower rates. And if you can get a better new borrower rate, you should take it.”

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