Westpac is now expecting the Reserve Bank to start raising official interest rates as early as August, half a year earlier than it previously thought.
The bank's economics team — led by its highly respected veteran chief economist Bill Evans — is tipping a gentle, 0.15-percentage-point cash rate rise in August, followed by another 0.25-percentage-point increase in October.
Financial comparison website RateCity said those two moves would add $103 a month to interest repayments on a typical $500,000 mortgage.
Westpac is anticipating the earlier move because it believes the RBA has been far too conservative in its forecasts around unemployment, wages and inflation.
By the August meeting, Westpac expects the Reserve Bank's preferred measures of consumer prices to have met, or exceeded, the mid-point of its 2-3 per cent target range for three quarters in a row.
The next reading on inflation — the Consumer Price Index for the December quarter — will be released by the Australian Bureau of Statistics (ABS) next Tuesday.
Westpac's economists also expect annual wage growth to be running at 3 per cent by the end of June as a shortage of workers filters through to bigger pay rises from employers to attract and retain staff.
The shortage of available workers was highlighted by data released today by the ABS — shortly after Westpac's new forecasts were published — which showed a jobless rate of 4.2 per cent in December, the lowest since August 2008.
That figure adds weight to Westpac's forecast of a 4 per cent unemployment rate by the middle of this year, and 3.8 per cent by the end of 2022.
While Westpac's economists do expect the Omicron COVID-19 variant to dent Australia's economy, they also anticipate the effect will be transitory, although they do note the risk of future variants and waves of the virus, especially over winter.
Its economists also expect that the reopening of borders will reduce some of the labour shortages that are starting to drive up wages.
"Increasing wage pressures and tightening labour markets are important preconditions for these forecasts," Mr Evans noted.
Cash rate expected to reach 1.75 per cent
Aside from bringing forward the timing of the first rate increase by six months, Westpac has also changed its forecast for how many rate rises will be needed to keep inflation in check.
It was previously expecting the cash rate to max out at 1.25 per cent during the current cycle, but is now tipping a peak cash rate of 1.75 per cent by March 2024, although Mr Evans says official interest rates in Australia are likely to peak at a slightly lower level than those in the US.
Nonetheless, that is a 1.65-percentage-point increase on the current RBA cash rate target of 0.1 per cent.
With Reserve Bank figures showing the average existing variable borrower is on a rate just below 3 per cent, that would take typical mortgage rates above 4.6 per cent.
RateCity analysis shows that would cost someone with a typical $500,000 mortgage an extra $427 a month in repayments after March 2024.
"While the exact timing of the next cash rate hike is still not certain, borrowers need to know that rates are on the rise — it's just a matter of when," said RateCity's research director Sally Tindall.
"Recent APRA data shows the average borrower is currently 45 months ahead on their repayments, however, that doesn't mean every borrower will be able to take these rate hikes in their stride.
"One way you can prepare for future hikes is to get ahead on your repayments now while rates are still low.
