"There are probably going to be more rate rises than people think"

Big bank boss says RBA's tightening cycle could last longer than expected

"There are probably going to be more rate rises than people think"

The Reserve Bank may have to sustain its rate-hiking cycle longer than expected, especially if demand doesn’t slow significantly and curtail economic growth, according to the head of ANZ.

During a speech in Adelaide Friday, ANZ chief executive Shayne Elliott said that while unemployment was low and savings rates were high, the market outlook wasn’t as bleak as some experts were anticipating, The Australian reported.

“The economy is in really robust shape, and actually households are in much better shape than people think,” Elliott said. “People think things look a bit bleak … [consumers] are saving more, they are paying down debt. People are more employed in Australia than ever before and they are confident about keeping their job and they are confident that their pay is going to come.”

Elliott said all those factors suggested that rates may continue climbing for some time as the RBA tries to fight inflationary pressures and cool demand, The Australian reported.

“If the economy after all these rate rises is still really robust, that says there are going to be a lot more rate rises,” Elliott said. “There are probably going to be more rate rises than people think.”

ANZ’s economic team, however, said this week that they expected growth to slow throughout the year as consumers felt the impact of higher interest rates and a fall in real wages due to higher inflation. They predict that the central bank will hike the cash rate to 3.85% this year, up from its current 3.1%, The Australian reported.

The RBA’s next monetary policy meeting is on Tuesday. Most economists expect the central bank to hike rates another 25 basis points.

Rate rises are a good thing for bank’s net interest margins, meaning the banking sector has benefited from the RBA’s tightening cycle.

Read next: February rate hike will cut borrowing power by $143,000

Even with borrowers facing rising mortgage repayment amounts, Elliott said ANZ’s loan losses and property and home repossessions were at historically low levels, The Australian reported.

Elliott said that ANZ had one million home loans and a repossession rate of about 100 – significantly lower than an average cycle of around 400 repossessions. The share of home loans 90 days past due was 0.5%, compared to a long-term average of 1%.

“It’s the lowest it’s ever been, so less people are under actual stress today than ever before,” Elliott said. “That number is falling … it’s still going down.”

Mortgage cliff

With rate rises typically having a delayed impact on the economy, Elliott said it was difficult to predict how customers would handle further hikes. He acknowledged that many fixed-rate borrowers will face a “mortgage cliff” as their low fixed rates expire in the coming months.

“They are going to have a bit of a shock,” Elliott said. He noted, however, that many fixed-rate borrowers were assessed with a buffer rate of 3% over and above the loan’s interest rate.

“Yes, there will be people who find it quite shocking … but in the system sense [mortgage stress] is still relatively modest,” he said.

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