S&P/ASX 200 Index (ASX: XJO) banks broadly benefited from the Reserve Bank of Australia's first interest rate hike earlier this year.
That 0.25% increase on 3 May brought Australia's official cash rate up from the all-time low 0.1% to a still historic low 0.35%.
Small, gradual increases in the benchmark interest rate can benefit the ASX 200 banks by enabling them to increase their own lending margins.
Faster and bigger increases from the RBA can hinder the ASX 200 banks' loan books by decreasing demand for new mortgages and other loans, and increasing the number of bad debts they hold.
Hence, mortgage holders and investors alike took note of the RBA's 0.5% increase on 7 June followed by another 0.5% increase earlier this month on 5 July, bringing the official cash rate to 1.35%.
The more aggressive tightening has seen the ASX 200 bank shares come under pressure along with much of the broader market.
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How high will the RBA hike rates?
The most recent rate hike almost certainly won't be the last one we see.
In the RBA's minutes, released yesterday, the central bank said "inflation was expected to increase in year-ended terms through the remainder of 2022".
As for its expected response, the RBA stated:
The current level of the cash rate is well below the lower range of estimates for the nominal neutral rate. This suggests that further increases in interest rate will be needed to return inflation to the target over time.
Of the ASX 200 banks, Australia and New Zealand Banking Group Ltd (ASX: ANZ) is forecasting the most aggressive tightening from the RBA. ANZ believes the central bank will boost the cash rate by 0.5% in each of the next four months. That would put the benchmark interest rate at 3.35% in November.
Commenting on ANZ's outlook and the impact on borrowers, RateCity research director Sally Tindall said (quoted by 9 News):
ANZ now believes the cash rate could hit 3.35% by November – that would be a rise of 3.25 percentage points in the space of seven months. With central banks hiking official rates around the world, it's difficult to see the RBA doing anything less than a double hike in August.
Many families are already under the pump with skyrocketing grocery and petrol costs. Hefty increases to mortgage repayments, on top of this, could tip some into the red.
As for the other ASX 200 banks, Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) are all aligned in the belief the RBA will reach a 2.6% cash rate by November.
How have the ASX 200 banks performed since the rate rises?
May's rate increase was the first hike by the RBA since November 2010.
So how have the ASX 200 banks performed compared to the benchmark since rates have started rising?
Well, the ASX 200 has lost 7.5% since the opening bell on 3 May.
Over that same time, the CBA share price is down 6.1%; the NAB share price is down 7.5%; the ANZ share price has tumbled 20.6%; and Westpac shares have dropped 14.1%.
