Cash rate to dent big bank earnings: VanEck
The Reserve Bank of Australia’s decision to raise the official cash rate by 25 basis points to 0.35% will put the big four banks under new pressure in the month ahead, according to VanEck.
VanEck head of investments and capital markets, Russel Chesler, said this was because higher rates would dent the banks’ earnings from mortgages and bad debts due to higher credit costs.
“The prospect has already hit confidence in the property market; Sydney auction clearance rates tumbled over the weekend, and that weakness is likely to spread to other capital cities, as higher interest rates feed through to the broader property market and the prospect of falling property prices through 2022 turns people away,” Chesler said.
Chesler predicted interest rates to rise another 25 basis points at the RBA’s June meeting and reach 1.75% to 2.25% by the year’s end.
“With interest official interest rates forecast to end the year at between 1.75% and 2.25%, this is likely to push variable interest rates on mortgages over 4%, adding hundreds of dollars a month to monthly repayments given the huge size of Australian mortgages,” he said.
“In this environment, with inflation running hot and interest rates rising, companies, including cyclical stocks, that can increase their prices and keep their customers at the same time, are likely to outperform,” he said.
Cyclical stocks were more resistant to rising costs than growth stocks, Chesler said, as they relied less on future earnings potential for their current valuations.
“In terms of other sectors, gold shares and infrastructure stocks (whose earnings are often tied to inflation) are likely to do relatively well. Both are defensive and more resistant to share market volatility and with the high levels of market volatility we are seeing this year, investors are seeking out safe havens.”
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