Two of Australia’s major banks – NAB and ANZ – this month increased a range of fixed home loan rates by as much as 0.6%.
The central bank cash rate, meanwhile, has stood pat at a record low of 1.5% since August, and economists remain divided on which way the next move will be.
The banks’ interest rate increases may well be a gift to the Reserve Bank of Australia, giving it flexibility to reduce the benchmark interest rate without worrying about further fueling the overheated housing market.
Here are five reasons why the RBA may actually favor slightly higher mortgage rates, and the banks may move independently.
Financial Stability: RBA Governor Philip Lowe, who took over in September, has flagged his reluctance to drop rates further for fear of stoking surging property prices and record household debt levels. Banks increasing interest rates soothes some of these fears and gives room for the RBA to act if inflation drops further or the economy needs a boost
On hold for longer: If banks start putting up their interest rates, then they are essentially shouldering some of the responsibility of cooling the national residential property market, which registered a 10.9% growth in 2016, the biggest increase in seven years, according to CoreLogic. That means the RBA can let its cash rate languish at 1.5% for longer to support the non-residential parts of the economy.
Rising funding costs: Funding costs are rising for the banks as global bond yields rise and spectre of higher U.S interest rates looms. Non-deposits – or money from credit markets – account for a third of the largest Australian banks’ funding needs, and the spreads are starting to rise, forcing the banks to take a hard look at their lending rates. “There are a range of factors that influence the funding that NAB – and all Australian banks – source, so we can provide home loans to our customers,” NAB’s Chief Operating Officer, Antony Cahill, said in a statement. “The cost of providing our fixed rate home loans has increased over recent months.”
Out of cycle increases: Morningstar’s banking analyst David Ellis sees the possibility of higher variable mortgage rates, which make up a quarter of total outstanding home loans, as banks try to offset the higher funding cost and protect net interest margins, a key measure of lending profitability. The measure has slipped to the lowest level since the global financial crisis amid competition and record low lending rates.
Slowing profits, higher capital needs: The banks after racking up seven years of record profits are starting to see a a slowdown as corporate bad debts rise and competition mounts. At the same time capital requirements are increasing stemming from global regulation aimes at preventing a repeat of the 2008 global banking crisis. With banks already capping their dividend payout ratios to boost retained earnings, they are also expected to be less generous with lending rates.