Commonwealth Bank of Australia (ASX: CBA) CEO Matt Comyn is keeping an eye on the Reserve Bank of Australia (RBA).
That's because Australia's booming housing market is heavily reliant on debt. And this debt has been more easily serviced in recent years than at any other time in history, thanks to record low interest rates.
While mortgage rates charged by the big banks like CBA obviously run a bit higher, the RBA's official cash rate stands at a rock bottom 0.10%.
So far the central bank has held fire on raising the cash rate. But with inflation creeping higher and leading central banks across the world signalling multiple hikes this year, the RBA is widely expected to begin tightening its policies as well.
Why CBA's Comyn urges restraint
CBA forecasts that the Aussie economy will continue to perform strongly through 2023, or beyond.
According to Comyn (quoted by the Australian Financial Review):
We have the lowest unemployment rate in 13 years, and are going to touch on the lowest unemployment rate since the early 70s later this year. They are a very strong set of economic conditions showing Australia is performing well, and a good set of conditions for the Commonwealth Bank.
With these strong conditions in mind for the year ahead, CBA expects inflation to run in the range of 3–3.5%, which is above the RBA's target of 2–3%.
To keep inflation in check, Comyn believes the RBA will raise the cash rate to 0.75% by the end of 2022 and ratchet it up to 1.25% later into 2023.
Noting that higher rates could put some mortgage holders under stress, Comyn is cautioning the RBA to raise rates in a "gradual and modest" way.
Interest rates and house prices
Comyn said if the RBA takes this approach there would only be small falls in Australia's house prices in 2023. But he cautioned that rapid, higher increases in the cash rate could hit the economy and home prices harder.
The CBA boss said that under the gradual approach (increasing the cash rate to 0.75% in 2022 and 1.25% in 2023) house price growth will decline to 4–7% in 2022 and then prices will fall 5–10% in 2023. Those figures, he said, "shouldn't give our customers too much cause for concern".
So what should property owners and investors expect?
According to Comyn (quoted by the AFR):
We think rates will go up quite slowly. We expect the strong economic momentum to carry through to at least the end of 2023 and feel very optimistic about the outlook for the Australian economy over this period…
Even if the cash rate increases by say 100 basis points over the next year or year-and-a-half, the increase in the repayment amount will be modest compared to what we have seen on other cycles.
CBA share price snapshot
CBA shares have slightly outperformed the S&P/ASX 200 Index (ASX: XJO) in 2022.
Year-to-date the CBA share price is down 3% compared to a 4% loss posted by the ASX 200.
