The ANZ is tipping the cash rate will hit 3.35 per cent this year, with the Reserve Bank conceding first-home buyers are most vulnerable to defaulting, with many facing 40 per cent higher repayments by the end of 2023.

In an address to the Economic Society of Australia in Brisbane on Tuesday, RBA deputy governor Michele Bullock said most mortgage holders had buffers, preparing for rate increases by fixing loans and amassing savings during the pandemic.

She said building domestic price pressures would see further hikes to the cash rate in coming months.

“Just how high and how fast the cash rate is raised will depend on many factors, but in making this assessment one of the areas the board will be closely observing is how households respond to the combination of rising interest rates and prices,” Ms Bullock said.

ANZ is predicting four successive 50 basis point rate hikes in August, September, October and November – a full 200 basis points of tightening that will see the cash rate hit 3.35 per cent by November.

The Reserve Bank of Australia might also opt to hike rates by more than 50 basis points at one of those meetings, although that would not imply a higher terminal rate, ANZ head of Australian economics David Plank wrote.

“At this stage our thinking is that the cash rate will need to remain at this restrictive setting for an extended period, given persistence in core inflationary pressures,” he said.

Nearly 30 per cent of borrowers would face increases of more than 40 per cent of their current repayments if variable mortgage rates rise by 300 basis points, the central bank says.

Those rolling off fixed-rate loans to a variable rate would face an increase in repayments of at least 40 per cent, equating to $650 a month by the end of 2023.

Recent borrowers were more vulnerable to rate increases, having less time to accumulate equity and liquidity buffers, Ms Bullock said.

Government policies to improve housing-market accessibility for first-home buyers during the pandemic also means they are more highly represented as recent borrowers.

“Historically, first-home buyers have tended to have persistently higher loan-to-value ratios and lower liquidity buffers than other borrowers, making them more vulnerable to a given house price or cash flow shock,” Ms Bullock said.

“If the borrower were to experience a fall in income or an increase in expenses, they might find it more difficult to service the loan.

“And in an environment of increasing interest rates, there is a risk that households with high debt-to-income ratios will find it more difficult to service their debt.”

ANZ’s prediction is based on the strong momentum in the labour market, with last week’s monthly jobs report considered the best in nearly five decades.

Minutes from the Reserve Bank’s last meeting on July 6 indicated board members said the cash rate needed to rise, but the board doesn’t have a good idea how much it will take to stop stimulating the economy.

JP Morgan analyst Tom Kennedy said another 50 basis point hike was likely at the RBA’s next meeting.

“But given last week’s blockbuster labour data and the high likelihood of another strong inflation print next week, it’s clear the probability of a super-sized move has increased,” Mr Kennedy said.

The last rates decision came ahead of record low unemployment figures of 3.5 per cent for June.

The RBA had previously tipped unemployment rate would not reach these lows until June 2023.

It will decide interest rates next on August 2.

Derek Rose and Andrea Hayward
(Australian Associated Press)