Banks lifting interest rates, ignoring RBA's holding pattern

The Reserve Bank of Australia has decided that interest rates have to sit tight for now but the banks haven't received the memo, as they continue to lift their own borrowing rates despite the RBA pause.

Banks lifting interest rates, ignoring RBA's holding pattern
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New Reserve Bank of Australia Governor, Michele Bullock, has taken a conservative approach to her first monthly rates decision, keeping the official cash rate unchanged at 4.10 per cent.

The pause marks the fourth successive month the RBA has held off on the temptation to deliver one more blow to what remains a stubbornly high inflation rate.

Inflation rose in August, reversing a downward trend that has been in place since April. At 5.2 per cent, the inflation rate is still well outside the 2-3 per cent band that is the RBAs target.

But despite the RBA’s inaction as it waits for earlier rate hikes to bite, the nation’s banks have had no such qualms about hitting borrowers where it hurts.

Almost half, 48 per cent (43 of 90) of lenders observed by Canstar have increased variable rates since the July cash rate decision by an average of 0.15 per cent. 

Fixed rates have been hardest hit in this time, with 65 of 80 of lenders  (81 per cent) offering fixed rates increasing fixed rates by an average of 0.27 per cent.

Shorter-term fixed rates of one and two years experienced the greatest number of lenders increasing interest rates following the July cash rate decision.

Canstar’s Editor-at-Large and money expert, Effie Zahos said lenders are not waiting for official cash rate movements to adjust their home loan interest rates.

“In an attempt to claw back profit margins, a significant number of lenders have increased both variable and fixed rates in the three months the Reserve Bank has left the cash rate paused at 4.1 percent.”

Borrowers doing it tough

Ms Bullock, delivering her first Monetary Policy Decision statement, hinted that if there is to be another interest rate movement, it is more likely to be up than down.

“Some further tightening of monetary policy may be required to ensure inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks.

“The Board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market (and) remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”

Ms Bullock said there are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages respond to the slower growth in the economy at a time when the labour market remains tight.

She also acknowledged that many households were doing it tough.

“The outlook for household consumption remains uncertain, with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income.

“And globally, there remains a high level of uncertainty around the outlook for the Chinese economy due to ongoing stresses in the property market.”

More rate pain tipped to come

For the first time this year, all 38 Finder panellists correctly predicted a cash rate hold.

While almost half of the experts who weighed in (48 per cent, 16/33) believe the cash rate has peaked at 4.10 per cent, more than two in five (42 per cent) believe the rate will peak at either 4.35 per cent or 4.60 per cent.

This could mean at least one more rate rise before the end of the year. 

Stephen Miller, Advisor at fund manager GSFM, said the RBA may have still have struggle on its hands.

“Inflation will be ‘stickier’ than forecast driven by accelerating wage growth and poor productivity,” he said.

Geoffrey Kingston, Economics Professor, Macquarie University Business School, also suggested speculation about an eventual rate cut was premature.

“There was bad news this month on oil prices, and the CPI and futures pricing of the cash rate call for one, maybe two, rises in the next six months or so, however, bank inertia should see to it that this rise is later rather than sooner.”

The Finder panel of experts believes there is on average a one in three (32 per cent) chance of Australia falling into a full recession next year. 

The average Australian had $39,459 in savings in September, according to Finder’s Consumer Sentiment Tracker. That’s up from $28,401 in September 2021, and a record high since Finder began tracking in May 2019.

Despite this, an alarming 44 per cent of Aussie workers couldn’t survive financially for more than a month if their income dried up.

Almost one in five (18 per cent) workers are living day to day, only able to make ends meet for a week or less should they become unemployed.

Moodys Investors Service Researcher, George Liondis, last week penned a report that found mortgage delinquency rates increased in every Australian state, territory, capital city and most regions over the year.

“We expect delinquency rates will continue to rise moderately through to the end of this year as high interest rates and cost-of-living pressures further erode household savings.”

“While mortgage delinquency rates are rising broadly across Australia, this is most pronounced in regions where median household income is in the bottom third of the state.

“These regions are also typically outside metropolitan areas.

“Mortgage borrowers in these areas are bearing the brunt of high interest rates and inflation.”

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