Spring to bring more interest rate rises

Most economists are tipping further rate rises between September and October, though opinion is divided on just how high the RBA will go, and how soon they will act.

On the low end of the scale, the Commonwealth Bank is predicting that the official cash rate will rise from its current position of 1.85 per cent to a high of 2.6 per cent as soon as November.

ANZ and Westpac are tipping a rise to 3.35 per cent - by November and February, respectively; while NAB is predicting a peak of 2.85 per cent by November.

ANZ economist Felicity Emmett told ACM that rate rises would trigger further price declines in regional markets in the coming months.

"We would also expect that regional prices will decline as well, the main reason that we think that house prices will decline is because the amount that people can borrow will be reduced under higher interest rates and on our forecasts, that borrowing capacity, or that maximum borrowing capacity will be reduced by nearly 30 per cent.

"... so when they go to the auction on the weekend, or when they put a bid in for a home, they will have less money to spend. And so we do expect to see price declines really widespread across the country."

Outside of the major banks, economists agree mortgage holders have some further nasty surprises in store this spring.

Speaking in Canberra in late August, economist Saul Eslake said the Reserve Bank "almost certainly" had further to go in raising the official cash rate.

"[The Reserve Bank is] not done with raising interest rates yet, even though we've already seen rates rise by 1.75 percentage points in four months - the fastest tightening since the second half of 1994," he said.

"I don't think they'll go as far as the financial markets, which are pricing that the cash rate will rise to about 3.5 per cent. In my view, the Reserve Bank will over the rest of this year raise the cash rate to around 2.5 per cent, in practical terms since they're not doing even quarters and halves at the moment that probably means either 2.35 or 2.6 per cent - I think 2.6.

"When they reach there, they'll pause to see what impact what they've done has had on the economy and also to assess whether - given what I think will be happening to inflation globally - whether there are reasonable grounds to except inflation here to start falling," he said.

"After reaching a peak that I agree with them will probably be of the order of 7.75 per cent in the fourth quarter of this year, remembering that the inflation number we have up to the June quarter of 6.1 per cent doesn't incorporate recent increases in electricity, household gas prices, and doesn't incorporate the impact at the end of September of the reinstatement of the full level of petroleum product excise."