RBA’s Rate Cuts

Interest rates on loans have been dropping over the past few months. Economists have been predicting when the next rate cut could happen if it happens at all. It has been expected that next April would bring another rate cut from the Reserve Bank of Australia. The rate cut on interest would likely bring the RBA’s cash rate down to 2 percent. But now economists are starting to predict that that will never happen.

Banks have already begun quietly raising their rates on some types of loans. Rates on all investment loans have risen 0.27 percent recently. Reserve Bank governor noticed along with politicians but there had been no uproar. Usually this rise might only apply to new borrowers but in this case it happened across the board. New borrowers will still likely be hit even harder with higher rate increases. Advertised rates will also be raised by 0.27 percent so new investment loans will affectively have 0.54 percent higher interest rates for new borrowers. These increases in interest rates on investment loans are due in part from the new capital regulations coming through to help the banks shore up against risk. The more capital the banks need to hold and not profit from, the more those banks need to profit from the money they have lent out.

The biggest issue for borrowers is coming from afar. As the Reserve Bank of Australia has been flirting with lowering rates further, the Federal Reserve Bank of the United States of America has been talking about raising rates. Markets are predicting that the Federal Reserve will raise rates in December of this year but there is growing suspicion that the rate increase will come this September. The Fed publishes its interest rate forecast but the market does not believe that the interest rates will rise as fast as the forecast.

The difference in what the market is predicting and what will actually happen can send shockwaves throughout the economic world that will definitely hit home in Australia. The rate cuts that have been on the drawing board now here in Australia might never happen. If there isn’t another rate cut next year because of rising interest rates in the U.S. then borrowers can only assume that it will not be that long before the Reserve Bank of Australia begins to raise rates as well. The big Australian banks have already begun.