While the Reserve Bank kept kept rates on hold when it met on Tuesday – and, according to most economist, is likely to do so for the next few months – that doesn't mean things will necessarily stay on hold for borrowers.
In recent months, Australia's big four banks, along with a number of smaller lending institutions, have regularly raised rates, particularly for interest-only borrowers, effectively tightening monetary policy despite the central bank's caution. Household debt, new figures show, is at a record high.
More BusinessDay Videos
- Video duration
- 01:53
Interest rates unchanged
Interest rates unchanged
The Reserve Bank has kept interest rates at the historic low of 1.5%. Economics editor at The Age Peter Martin, explains why.
Up Next
ASX winners and losers - a snapshot
- Video duration
- 00:43
- Video duration
- 00:43
ASX winners and losers - a snapshot
ASX winners and losers - a snapshot
The stand out listings traded on the ASX captured at key moments through the day, as indicated by the time stamp in the video.
Up Next
HSBC economist sees pick up in wages growth
- Video duration
- 03:01
- Video duration
- 03:01
HSBC economist sees pick up in wages ...
HSBC economist sees pick up in wages growth
HSBC economist Paul Bloxham says the lift in commodity prices will lead to a growth in wages later this year.
Up Next
Coke's latest sugar-free drink
- Video duration
- 00:52
- Video duration
- 00:52
Coke's latest sugar-free drink
Coke's latest sugar-free drink
Coca-Cola introduces No Sugar, the latest offering in the company's sugar alternative drinks.
Up Next
Coca-Cola earnings report
- Video duration
- 00:34
- Video duration
- 00:34
Coca-Cola earnings report
Coca-Cola earnings report
Coca-Cola Amatil has announced it will close its South Australia manufacturing plant after posting a drop in annual profit.
Up Next
Unions rally against penalty rate cuts
- Video duration
- 01:13
- Video duration
- 01:13
Unions rally against penalty rate cuts
Unions rally against penalty rate cuts
The Federal Court has heard a legal challenge to cuts to penalty rates lodged by the Hospitality union United Voice.
Up Next
Will geo-politics be a distraction at the G20?
- Video duration
- 02:22
- Video duration
- 02:22
Will geo-politics be a distraction at the ...
Will geo-politics be a distraction at the G20?
Treasurer Scott Morrison says the G20 will always take opportunities to discuss international security issues such as developments over North Korea.
Up Next
A great day for Whyalla: SA Premier
- Video duration
- 01:15
- Video duration
- 01:15
A great day for Whyalla: SA Premier
A great day for Whyalla: SA Premier
South Australia Premier Jay Weatherill announces the sale of steel maker Arrium to London-based company Liberty House.
Interest rates unchanged
The Reserve Bank has kept interest rates at the historic low of 1.5%. Economics editor at The Age Peter Martin, explains why.
According to a UBS analysis, the spread between the RBA's cash rate and the private sector borrowing rate has doubled since 2007, swelling to 350 basis points, taking the interest rate most commonly paid in the economy close to 5 per cent.
The RBA took its cash rate to a record low 1.5 per cent in August 2016. Since then, UBS' economists estimate the average mortgage rate has increased by 25 basis points, or a typical RBA rate hike.
"Although the RBA cut by 50 basis points across May 2016 and August 2016, average mortgage rates fell by only 14 basis points, while interest-only rates [for investors and owner-occupiers] are now actually higher," UBS wrote to clients.
The mortgage rises come as the Australian Prudential Regulation Authority has imposed new regulations on banks to limit the growth of interest-only mortgages – including through limiting the portion of the banks' loan books that can be allocated to this type of loan, and through limiting the year-on-year growth of housing loans to housing investors. The banks have responded by raising interest rates on such loan categories.
Analysts have welcomed the "mortgage repricing" initiatives, with a recent analysis by Morgan Stanley having found the rises by themselves have "largely offset" the impact the federal bank levy announced in the May government budget had on bank profitability.
But the banks have had little choice but to raise the rates they charge borrowers, said Market Economics' Stephen Koukoulas.
He points to RBA data that shows the net interest margin of the major banks has been steadily decreasing since 2000. While the banks are charging more for loans, the rates they have to pay to access capital is also rising.
According to the RBA, 60 per cent of major bank funding comes from domestic deposits, which, Mr Koukoulas points out, the banks pay above-cash-rate interest rates on.
Around 20 per cent comes from short-term debts, and another 10 per cent from long-term debts, with the remainder made up of equity and the securitisation of loans (which has rapidly decreased since the global financial crisis).
"The banks do a dreadful point of marketing this, but the cash rate doesn't provide the benchmark for their funding costs," he said.
"It's an important driver, but in a post-GFC world where they're relying on wholesale funding, term deposits and those sorts of things, the cash rate is less relevant than it was.
"It's still important, but there are other things at play."
Outside the major banks, representatives of small lenders and mortgage brokers this week told the Financial Review they were grappling with the most volatile funding conditions since the GFC, despite the low cash rate.
The financial crisis also hit bank funding costs through a raft of global and local regulations aimed at ensuring bank stability, which have had the net effect of raising funding costs and requiring banks to keep more of their assets in low-interest, safe vehicles, such as cash and bonds, which offer far lower returns than could be had by lending that money out.