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

The era of rate hikes is far from over. Unusually for the Reserve Bank of Australia, last month’s cash rate announcement and meeting minutes flagged the board’s intentions to announce more rises in the coming months, all to curb runaway inflation that has yet to slow down. 

As a result of the current tightening cycle, interest rates now sit firmly within contractionary territory, meaning the board considers them high enough to start squeezing inflation out of the economy. Despite this, the Big Four banks reckon we haven’t reached the cash rate peak yet, so there’s still more mountain to climb. 

But with property prices tanking and more borrowing standing at the gates of mortgage prison, could the RBA take it too far?

Let’s get into the cash rate predictions for the 7 March RBA decision.

Even the current 3.35% cash rate seemed unthinkable to hawkish economists at one point. But RBA governor Philip Lowe defended the board’s determination to raise interest rates in the face of mounting mortgage and rental stress, citing inflation as far more ‘corrosive’ to the economy and the welfare of Australians.

“People are really hurting, I understand that. But I also understand that if we don’t get on top of inflation it means even higher interest rates and more unemployment,” Lowe explained.

“If inflation stays high, it’s very damaging to the economy. It worsens income inequality, it makes it harder for businesses to plan, and it erodes the value of people’s savings.”

RELATED: Why do rate hikes fight inflation?

As a result of this mindset, another rate hike in March seems inevitable. Commonwealth Bank, Westpac, ANZ, and NAB agree the RBA will move by another 25 basis points, lifting the cash rate to 3.60% p.a. 

This decision will cascade into more lifts to variable rate mortgages in March. Savings rates will likely see a boost, too, but these rises have been more modest and few between than the changes made to home loans.

For context, last year's average interest rate for owner-occupied variable home loans clocked at around 3.14% p.a. in the Mozo database (1 March 2022). Now, it’s 5.88% p.a.

According to the Big Four Banks, March’s RBA decision will be followed by several 25 bp movements into winter, pushing the cash rate to 3.85% as early as April or 4.10% as late as June.

Cash rate peak predictions from the big banks (1 March 2023)

CBA has the most dovish estimate, with a 3.85% peak in April. Westpac is the most hawkish, with a speedy round of 25 bp hikes shoving rates as high as 4.10% in May.

NAB and ANZ have built in a pause in April, as the Australia Bureau of Statistics (ABS) will release new wage growth data around then for the RBA to consider. If wage growth proves too slow, the RBA may hold off for another month to allow borrowers time to recuperate. 

Before the February RBA meeting, 3.85% served as the most extreme rate peak prediction.

According to the ABS, borrowers scrambled to refinance $19.1 billion worth of mortgages in December 2022, fleeing rising costs brought on by RBA rate hikes. But rate hikes can also hurt borrowers’ chances at successfully refinancing, trapping them with mortgages they can no longer afford.

Rising interest rates cause falls in property prices, which can eat into the equity of some homeowners – even drawing them into negative equity if they bought recently with a smaller deposit. A high LVR makes a borrower seem riskier to a lender because they may owe more money than their home is actually worth.

Interest rates also affect upper serviceability test limits. When applying, lenders will assess your ability to pay off your mortgage at interest rates above and below their current variable offer. This means you not only have to qualify for the current interest rate, but one that’s theoretically 3% higher – and how many people can afford a home loan in the 7% - 9% range?

Luckily, savvy borrowers can negotiate a way out of this through careful financial planning and research. However, it can also escalate into full-blown mortgage prison if the risks aren’t managed, which is the worst-case scenario. 

Mortgage prison can lead to homeowners defaulting on their loans, and if too many do this at once, it can be a hair-trigger for an economic recession. The RBA has been carefully trying to avoid this, as pushing rates too high can spiral out of control and ruin the ‘soft landing’ it wants. 

However, RBA governor Philip Lowe admits this is a ‘narrow path’ to tread. Rates need to be high enough to stop inflation, but not high enough to completely reverse it and crash the economy.

New buyers have a great window to buy into a falling housing market, though they’ll need to research and compare carefully to maximise their chances of nabbing a home loan that works for them. Refinancers, on the other hand, face a steeper hill to climb. 

Lenders look for red flags in your application, which all fall into two basic categories: high debt or uncertain income. Shopping on your credit card, taking out a car loan, switching jobs, having children, or even spending too much of your savings tell a lender you could be a risky investment.

Instead, give your home loan application a fighting chance with these strategies:

• Consolidate and pay off debt – of any kind. Lenders look at every type of debt you could incur, including HECS-HELP student loans and Buy Now Pay Later debt. Clear as much from your ledger as possible. 
  
• Pay attention to your credit card limits. Lenders consider your upper limits, not just how much you’ve charged on your card. If your card limit is $10,000, it could lower your borrowing power by the same amount. 
  
• What’s your credit score? Request a free credit report to make sure you’re in the green. If you’re not, take steps to improve your credit score.
  
• Cut back on extraneous spending. While most Australians have already tightened the proverbial belt to deal with inflation, watching your spending is still essential. If you can, try and put consistent amounts into a savings account, too, as this shows you’ve got room in your budget to handle rate changes. 
  
• Plan ahead, plan ahead, plan ahead. If you want to refinance this year, start cleaning up your finances now. Doing this lets you demonstrate consistent income, spending, and borrowing habits to a future lender. It also gives you time to compare home loans, such as those with low rates and offset accounts. 
  

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