Why mortgage rates might go up, even without the RBA

Even as the RBA keeps the official interest rate at 1.5%, many smaller Australian banks have recently raised interest rates, and this trend should worry all borrowers, even those who transact through the “Big Four,” according to The Sydney Morning Herald

While major banks have so far avoided hiking their mortgage rates, they face similar financial issues to smaller lenders.  In other words, they have to balance the backlash of raising rates with the profit margin pressure that comes with higher funding costs.

In the financial sector, a majority of economists believe that the central bank will keep official rates unchanged for another year or more, however many experts are expecting that commercial banks, which dictate the rate consumers pay, will hike rates regardless.

The Morning Herald cited the significant slowdown in “broad money” as one probable reason why these banks will increase rates. Broad money refers to currency and cash held by banks in deposits, and the slowdown suggests banks may need to spend more to obtain fewer home loan deposits.

Because deposits account for 60% of bank funding, higher deposit rates should lead to more expensive mortgages.

No one is entirely sure why the supply of “broad money” has been stagnating, but HSBC's Paul Bloxham said it is most likely related to the slow growth of businesses' cash on deposit.

Others have thought that these funds were starting to become insufficient because banks needed to keep safe funds before the end of the financial year, although this is looking less likely now that the first half of the year had passed.

Regardless of the cause, the important thing is that the slowdown in "broad money" growth comes at a time when banks are obligated to pay more in wholesale markets – another significant source of their funding.

AMP Capital chief economist Shane Oliver points out funding costs have been at a high level for about six months now. "It's starting to look structural," he said.

“Banks can either take the hit to profit, or pass on the impost to some of their depositors or their home loan customers. CBA and Westpac have recently taken the knife to some of their deposit rates, but logic (and history) suggests borrowers will probably feel the pain eventually,” The Morning Herald noted.

This is also why some analysts are anticipating a minimal (around 0.1 percentage points) interest rate hike from major banks.

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