Going up?! 4 things you need to know about interest rates right now

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Do you recall November 2010? 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. At that same time, the Reserve Bank of Australia raised the cash rate, to 4.75%, but since then we’ve seen the cash rate move to the historical low of 1.5%. So, why might the big banks now raising interest rates for homeowners? Here are the factors to consider…

1. 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 4 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.

2. The Rising Cost of International borrowing

Around 30-40% of the money our big banks lend comes from overseas, and over the past year the cost of this foreign funding has risen. And the reason for that is that around the world the flood of cheap money that emerged in the wake of the Global Financial Crisis in an attempt to stimulate the world economy has slowly been halted. All the big central banks have gotten behind the Third Basel Accord, 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…

3. 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.

4. 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. The Reserve Bank of Australia left the cash rate unchanged at a record low of 1.5 percent during the meeting held in February 2017, something they felt was consistent with sustainable growth and the low-inflation environment at home. However, with ripples from the changes in the global economy have already reaching us, and this is one to watch.

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