That pace of rate hikes could be absorbed by borrowers and lead to only modest declines in house prices in 2023, Comyn said, but more aggressive central bank action would heighten the risk that normalization of its cash rates is hurting the economy.
“We think rates will rise fairly slowly,” Comyn said.
“We expect the strong economic momentum to continue through at least the end of 2023 and we are very optimistic about the outlook for the Australian economy over this period.”
The impact of the omicron outbreak was “more modest than expected, with spending slowing only slightly,” he said.
But rising interest rates are now front and center for banking analysts and investors, and opinions differ on the impact the impending tightening cycle will have.
The CBA pointed out that higher rates would create tailwinds for its “net interest margin,” which will be supported by fewer customers taking out lower-margin fixed-rate mortgages and as banks earn yields. higher on their capital.
But investors fear higher rates could drive up bad debt, which would directly hit bank profits and put pressure on the housing market.
“You have high house prices, low unemployment and low bad debts given government support and interest rates so low, but the flip side is how bad can that be? ‘improve,’ said Hugh Giddy, senior portfolio manager at Investors Mutual.
“Even if interest rates go up, that can help net interest margin. be slowing house price growth?If higher rates cause house prices to fall, you’re going to have mortgage stress and more bad debts.
The ABC countered that multi-decade lows in unemployment, wage growth and high levels of household savings would work in its favour. He expects credit quality to be supported by wage growth of 3% over the next few months, an unemployment rate below 3 and a pandemic stock of consumer savings of $250 billion.
“We have the lowest unemployment rate in 13 years and we will hit the lowest unemployment rate since the early 1970s later this year,” Comyn said. “This is a very strong set of economic conditions showing that Australia is doing well, and a good set of conditions for the Commonwealth Bank.”
Other fund managers agree that it is the pace of RBA rate hikes and job prospects that will remain critical to banks’ performance.
“Absent a deterioration in employment, most people should be able to handle small increases in interest rates,” said Nick Vidale, investment analyst at T. Rowe Price.
“But if interest rate hikes are prolonged and larger than the market thinks, this could become a problem for larger writedowns in a few years.”
A 1% increase in the interest rate on an average $600,000 mortgage means $6,000 more in annual interest payments, or about $8,000 before tax. “Even if the cash rate increases say 100 basis points over the next year or year and a half, the increase in the amount of redemption will be modest compared to what we have seen in other cycles. “said Mr. Comyn.
The prospect of a cash rate hike to 75 basis points by the end of the year and 1.25% next year would lower house price growth to around 4-7% this year calendar, before residential market prices drop about 5 percent and 10 percent in the 2023 calendar, Comyn said. This level of shrinkage “shouldn’t be too much of a concern to our customers,” he added.
However, a spike in inflation – potentially caused by continued pressures on supply chains – that prompts the Reserve Bank to raise rates more aggressively, could lead to a steeper drop in house prices. Still, at the moment “the risk of inflation does not appear as extreme in Australia” as in the United States or Britain, he said.
The expected moderation in house price growth this year should be enough to head off any further macroprudential inventions by the Australian Prudential Regulation Authority to limit house lending. But Mr Comyn said the jury was still out on whether credit growth could be curtailed.
“If housing growth and credit growth pick up well beyond the elevated levels we’ve seen over the past 12 months, potentially macroprudential policy could come under closer scrutiny,” he said. .
Investors say that the practical transfer of higher rates on banks’ net interest margins will remain the primary focus of the market. Fierce competition for mortgages is expected to continue, even as official rates rise.
“Competition continues to be a significant headwind to margins and competitive pressures on margins are here to stay, and we would be cautious in extrapolating higher cash rates to improved net interest margin, although it might alleviate some of the headwinds that have been seen,” Mr. Vidale said.