As Australians continue to feel the impact of recent interest rate rises, BDO Debt Advisory Partner Darren Stacey explores the factors that are the driving forces behind the frequent increases.
There hasn’t been a great deal in financial markets to cheer about recently. However, the latest April 4 announcement by the Reserve Bank of Australia (RBA) to pause its rate rise cycle suggests it now takes a more cautious view of the current instability.
Prior to the rate pause, we saw 10 consecutive rate rises and we know it takes some time for these rises to flow through the economy. The impact of these rate rises has also been slowed by the higher than usual proportion of home loan borrowers with fixed-rate mortgages.
While additional rate rises were considered likely for April and May or June, it is feasible the RBA has now taken a wait-and-see approach for a few months. This will give the bank more time to assess the impacts of previous rate rises and gauge flow-on effects of overseas bank failures.
While Australian banks are some of the strongest in the world and are unlikely to have funding issues, the economic impact of this instability and any reduction in liquidity in the non-bank lending market can be monitored without the RBA having to continue to raise rates in the short term.
This gives borrowers more time to adjust and may, if the inflation indicators start showing more acceptable results, help the Australian economy avoid higher rates for the remainder of the year.
Regardless of any further moves by the RBA, to help avoid some of the pain, my advice from my article in April 2022 - The era of cheap loans is ending - still stands:
- If your financial position has improved, negotiate with your lender. You can make a case for a lower margin or why it shouldn’t increase
- Simplify your arrangements if you are paying for loan features that you aren’t using - removal of these could reduce your interest rate
- Reduce your loan (or your loan limit) if you can. The better your security cover for your loan, the better you can shield yourself from rising margins
- If you want to borrow more money for your next purchase or expansion, think about the structure of your loan arrangements and how to access the cheapest form of funding available efficiently
What drives interest rate rises?
Back in December, I wrote that further interest rate rises were still to come. The main issues driving interest rate rises then are still prevalent now – inflation and increasing lender funding costs.
Inflation remains elevated and recent data on spending patterns and credit card use highlight that the spending behaviour of the average Australian hasn’t materially changed. There is evidence that this spending behaviour has been partly fuelled by a drawdown in savings, which will ultimately slow down as these savings pools reduce.
While there does appear to be some easing in certain prices, I believe the Reserve Bank of Australia will still feel there is work to do to get on top of the inflation issue. Both ANZ and Westpac economists have recently advised they expected another one or two rate rises in line with our view from December. Importantly, they don’t see any cash rate reductions from the RBA until at least 2024 (ANZ forecasts the end of 2024).
Bank funding costs
With the recent financial system instability, wholesale markets for bank funding are likely to be worse in the near term, not better. While we’ve already seen upward pressure on bank margins, as their low-cost financing secured during the COVID years gets recycled, this is set to face another jump as banks focus on competing for deposits as an alternative to wholesale markets. This continued upward pressure on bank funding costs will only exacerbate the pain for borrowers as interest rate margins push up.
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