July RBA decision: Cash rate steady but home loan rates rising anyway

What’s the June 2018 RBA Cash Rate?

In its sixth meeting of the year, the RBA board agreed to leave the cash rate on hold at 1.50%.

This marks the 21st meeting in a row the RBA held rates steady, with the last rate movement taking place in August 2016 with a 0.25% rate cut.

Canstar Group Executive of Financial Services Steve Mickenbecker said weak wages growth was keeping the cash rate on hold.

“The RBA is concerned about mortgage stress as rates move up, with wages growth not strong enough to see borrowers of the last couple of years build a buffer to cover increased repayments,” Mr Mickenbecker said.

“The latest annual wages growth of 2% is just not enough to justify an increase in the cash rate this month.”

Funding costs puts pressure on banks to raise rates

While the official cash rate has not changed for nearly two years, short-term funding costs for lenders have been on the rise, resulting in increases to interest rates on home loans.

Benchmark short-term money market interest rates (Bank Bill Swap Rate or BBSW) – which banks borrow against – have been steadily rising since earlier this year, which has led to margin pressures on some Australian banks.

Mr Mickenbecker said this meant some lenders had increased interest rates on home loans.

“Lenders are finding their funding cost on the rise as rates move up in domestic and international wholesale markets, and are starting to pass on rates increases, irrespective of the RBA,” he said.

“In June, Canstar saw increases in variable interest rates – the litmus test for lenders’ view of their future funding expectation and the rate that has an impact on existing as well as new customers.

“The average increases ranged from 0.08% for residential principal and interest loans to 0.27% for residential interest-only loans.

“This is a little surprising as APRA has signalled the end of quantitative controls.

“At the same time, there have been reductions in fixed rates, allowing lenders to maintain an attractive rate in the market for new lending.”

Last week Canstar saw both the Bank of Queensland (BOQ) and Auswide Bank raise interest rates on a range of owner occupier and investment home loan products, after the banks announced rate rises would occur due to increasing funding costs.

In a statement recently, Auswide Bank Managing Director Martin Barrett said the bank’s rate increases of 0.05% for owner occupier home loans and 0.13% for investment home loans and residential lines of credit were made following recent increases to funding costs.

“Despite no increase in the official cash rate, we’ve had to make this difficult decision due to a sustained increase in 30- and 90-day BBSW levels,” Mr Barrett said.

“We are now paying significantly more for funding than we were six months ago which this increase will help offset.”

At the start of last week, BOQ Acting Group Executive of Retail Banking Anthony Rose announced a range of rate increases, citing similar reasons to Auswide Bank.

“Funding costs have significantly risen since February this year and have primarily been driven by an increase in 30 and 90 day BBSW rates, along with elevated competition for term deposits,” Mr Rose said.

Residential home loan rate movements in June

Investment home loan rate movements in June