raising interest rates

Why the talk on raising interest rates?

A simple take on how rising interest rates will affect your mortgage repayments in the future.

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The Reserve Bank of Australia is expected to keep interest rates on hold when the board meets next week, despite moves by the major banks to lift their lending rates on home loans.

AMP Capital chief economist Shane Oliver is among those who believes that rates will stay put at 1.5 per cent for some time yet.

The last time the RBA raised the cash rate was in 2010, when it moved to 4.75 per cent.

That was around the time that Australia’s prime minister was Julia Gillard, Brangelina were still together and the only ones who foresaw Donald Trump as president of the US were The Simpsons.

So why then do you think the big banks are rising their interest rates on mortgages?

Enter Stage Left…Donald Trump

The day after the US election we woke to a brand new world – one that can now boast a leader who was once a TV reality show judge and has engaged in legendary Twitter wars with whomever he chose to.

None of us know what Donald Trump’s four years in the oval office will bring, and his first weeks have certainly been “interesting” and markets are already betting on higher inflation as he spends big on infrastructure to “Make America Great Again”.

US bond yields are already up and the flow-on effect is spreading around planet.

This will lead to higher interest rates and borrowing costs – something that our banks are already factoring in to their bottom lines.

Rising cost of international borrowing

Around 30-40 per cent of the money our big banks lend comes from overseas, and over the past year the cost of this foreign funding has risen.

The reason for that is that around the world, the flood of cheap money that emerged in the wake of the financial crisis is slowing drying up.

All the big central banks have gotten behind global banking recommendations which requires banks to hold more capital to buffer them from any financial shocks.

All of which means borrowing international money has become more expensive for our banks.

Regulatory changes

Here in Australia, the banks are facing increased regulatory pressure from the Australian Prudential Regulation Authority (APRA).

It is APRA’s job to ensure that our banking sector remains strong and, over the past couple of years, it’s sharpened its focus on higher risk and overseas mortgage lending.

Australian banks face some of the toughest guidelines in the financial world, which set out how much cash and assets banks must hold respective to their loans, and the risks associated with their lending.

Triple whammy

Faced with elevated funding costs, increased regulation, and intense market competition for new customers, all the banks are being squeezed.

Without doubt, the banks are still making healthy profits, but they’re sitting under the 10-year average.

And, don’t forget, the business of banks is to make as much money as they can for their shareholders.

At its latest meeting in March 2017, the RBA left the cash rate unchanged at a record low of 1.5 per cent, something it felt was consistent with sustainable growth and the low-inflation environment at home.

But as we’ve seen by the increase in the banks’ interest rates, the ripples from the changes in the global economy have already reached us, and this is one to watch.

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