The Reserve Bank of Australia is unlikely to move on interest rates soon.
Economic growth is still too weak to justify a rate increase and the housing market too volatile for a cut.
Yet ANZ has now joined the NAB in warning customers that the official cash rate will increase twice in 2018, with a rise expected before May.
While the RBA has kept rates steady since last August, the big banks bar Westpac don’t think this will last.
So what’s really going on with interest rates?
Wholesale funding costs are going up
As a nation, we are borrowing far more than we are saving so banks need to get funds to make up for the shortfall.
About a third of the major banks’ funding comes from the wholesale markets, almost all of it from overseas from countries like the US.
The Bank of England in the UK is one of several central banks that has flagged future interest rate rises. Others like the US Federal Reserve have already increased their official cash rate.
Recently, the RBA’s Assistant Governor Luci Ellis said there has been a pick-up in economic activity globally and that could see rates overseas continue to climb.
“The global economy is looking better than it did a year ago. The turning point was around the end of last year. While it doesn’t seem to have picked up further recently, neither is this expansion a flash in the pan. That is positive news for the Australian economy, too.”
When banks overseas raise their rates, lenders here suddenly face higher wholesale costs which are then passed on to customers.
This is one reason why Australian lenders have this year increased rates independently of the RBA’s strategy of keeping rates on hold.
Existing customers are safer customers
Keep in mind that lenders are under pressure from the Australian Prudential Regulatory Authority to stop risky lending practices and limit credit growth.
At the same time, shareholders have an expectation that they maintain profits.
So from the bank’s perspective, it is far less risky to increase interest rates to existing customers than to chase new business.
This information is of a general nature and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances.
The banking tax
The other big cost for the big four banks relates to the new banking tax announced in this year’s Budget.
While we don’t know yet if these banks will pass this cost on to consumers, there’s every chance this will result in higher interest rates.
But while interest rates are on the rise, banks will need to be careful as the home loan market is highly competitive.
The other important factor is that the high levels of debt Australians currently hold makes borrowers here far more sensitive to increases in rates.
If people start defaulting on loans because they can no longer afford to pay them back, this puts far more pressure on banks, and ultimately Australia’s financial stability.