An Illawarra academic says it is likely that banks will again increase their interest rates in the coming months, regardless of what the Reserve Bank does with the cash rate.
Last week, the Reserve Bank announced that it was leaving the cash rate on hold at 1.5 per cent.
It was the 24th month in a row that it has left the cash rate at 1.5 per cent.
However, in contrast to the Reserve Bank, Westpac, ANZ and CBA have all announced in the past month that they will increase their standard variable rates.
Westpac has announced a 0.14 per cent (14 basis point) increase from September 19, ANZ has announced a 0.16 per cent increase from September 27 and CBA has announced a 0.15 per cent increase from October 4.
Alex Frino. Professor of Economics at the University of Wollongong said that while these increases may not sound like much, a 0.14 to 0.16 per cent increase in borrowing rates will increase repayments on a loan for the median house price in the Illawarra (of about $700,000) by about $980 to $1120 per year.
“That’s a significant hit to the family budget,” Prof Frino said.
“The cash rate is set by the Reserve Bank, and determines the rate at which your bank – NAB, Westpac, ANZ and CBA – can borrow money from the Reserve Bank of Australia.
“It used to be very influential in setting bank mortgage rates, and in the past your standard variable rate with a bank moved in lock-step with the cash rate.
“However, clearly, given the decision of three of the big banks in the past four weeks, this is no longer the case.
“These increases in rates have come during a period in which the Reserve Bank has not increased rates. So why has it happened, and what can we expect in coming months?”
Prof Frino said the CEOs of the banks that raised their rates have all come forward to state that their decision to raise mortgage rates is because market rates of interest at which they (the banks) borrow money have increased.
“This means that they must increase the rate at which they lend to you to pass on their increased costs,” he said.
Since August 2016 – coinciding with the period over which the Reserve Bank left rates at 1.5 per cent – the 90 Day Bank Accepted Bill Rate was about 1.75 per cent.
However, it increased by about 0.25 per cent to about two per cent in August 2016, and has been hovering at about two per cent ever since – approximately 0.25 per cent higher.
“More worryingly, the five-year bond rate, which represents the rate at which the federal government borrows money at reached their lowest level in August 2016 of 1.5 per cent, and has been increasing ever since and is now at around 2.25 per cent – approximately 0.75 per cent higher,” Prof Frino said.
“These increases in interest rates, and their magnitude, all serve to suggest one thing.
“A 0.14 to 0.16 per cent increase is likely just the beginning, and it is not if banks will increase interest rates again, but when.”