Australia’s interest rate forecast to hit 1.5 per cent next year

Australia’s interest rate is tipped to hit as high as 1.5 per cent by the middle of next year as the nation’s central bank moves to put a cap on soaring inflation.

AMP Capital economist Diana Mousina has outlined the investment manager’s new forecast for Australia’s interest rates, predicting the official cash rate target to hit 1 per cent by the end of 2022 before lifting to 1.5 per cent in mid-2023.

Australia’s interest rates are hovering at the record low level of 0.1 per cent.

“The RBA is getting close to raising interest rates. At its latest Board meeting, the RBA sounded more hawkish and seems to be setting the scene up for a rate hike in coming months,” Ms Mousina forecast.

“We expect the RBA to lift the cash rate to at least 1 per cent in 2022 (from 0.1 per cent) and then to 1.5 per cent in 2023.”

Looking even longer term, Ms Mousina said AMP Capital expects rates to be cut again in 2024 before hiking again in 2025 as “inflation starts getting uncomfortably high again”.

“In 2023 we also expect home prices to decline by around 5-10 per cent nationally which means a negative wealth effect for households,” she wrote.

“In this environment, the sharemarket is also likely to underperform.

“This low inflation and negative consumer backdrop could result in the RBA cutting interest rates again in 2024.”

While forecasts of rapid and numerous interest rate hikes may sound ominous, Ms Mousina said it is unlikely that housing interest costs will rise to “unsustainable levels”.

“The overall takeaway is that interest rates are going higher, but not likely to be high enough in Australia to choke off economic growth or cause a recession,” she wrote.

“So, on a 6-12 month view, we think that share market performance can still be solid and positive.”

The big question now remains not whether the RBA will hike interest rates – but when.

Last week Westpac joined the other “big four” banks in predicting the first cash rate hike to come in June this year following the release of RBA Governor Philip Lowe’s monetary statement.

“The surprise decision on Tuesday by the Reserve Bank of Australia board to abandon its ‘patient’ approach to monetary policy, has prompted the Westpac economics team to revise our forecasts,” Westpac chief economist Bill Evans said.

“Before the decision, we’d expected the Reserve Bank’s initial cash rate hike in the cycle to come in August this year, and for rates to peak in November 2023.

“Now we expect a much shorter tightening cycle, with a sequence of cash rate hikes beginning in June this year and peaking at two per cent a year later in June 2023.”