Banks Raise Fixed Interest Home Loan Rates Amid Rising Wholesale Funding Costs

Strategic Insights -

The big banks in Australia have begun to increase their fixed interest home loan rates, citing rising wholesale funding costs, despite the Reserve Bank of Australia's (RBA) decision to keep the official cash rate at a record low for over a decade. This move is a departure from the RBA's forecast, which suggested that interest rates could start to creep up in 2023, a year earlier than previously expected, or possibly even in 2024, depending on inflation and wages growth. The banks' decision to raise rates now is partly due to the RBA's decision in July to shut down its Term Funding Facility, which provided $188bn in cheap money to the banks during the Covid-19 pandemic.

Key Takeaways:

  • The RBA's record-low official cash rate has remained unchanged at 0.1% for over a decade.
  • Banks such as NAB, Westpac, and Commonwealth Bank have raised their fixed interest home loan rates by up to 0.5 percentage points.
  • The RBA has predicted underlying inflation to be about 2.25% next year, increasing to 2.5% by 2023.
  • The RBA's "central scenario" predicts wages will be growing by more than 3% a year by 2023, ending a pattern of stagnation.
  • The RBA may be forced to raise the official rate a year earlier than expected, depending on inflation and wages growth.
  • The banks' decision to raise rates now is partly due to the RBA's decision in July to shut down its Term Funding Facility.
  • Wholesale rates are increasing because traders expect the RBA to raise the cash rate in the future.
  • The ASX's cash rate tracker points to a rate above 1.2% by April 2023.

Statistics:

  • The RBA's official cash rate has remained at 0.1% for over a decade (since November 2020).
  • The RBA has predicted underlying inflation to be about 2.25% next year and 2.5% by 2023.
  • Wages growth is expected to be more than 3% a year by 2023.
  • The ASX's cash rate tracker points to a rate above 1.2% by April 2023.
  • The RBA's Term Funding Facility provided $188bn in cheap money to the banks during the Covid-19 pandemic.

Sources:

  • "Reserve Bank of Australia - Statement of Monetary Policy" - No date mentioned in the original text.
  • Australian Associated Press.
  • The Guardian (Ben Butler).