Interest Rates What is Happening

© Property Professor articles —
Reproduced with permission.

We started off a week or two ago with nervous smiles on our faces as we were anticipating a decrease in the official cash rate from the Reserve Bank of Australia (RBA) and finished up with frowns as not only did the RBA not decrease the cash rate but Westpac and ANZ increased their interest rates. “What is happening?” I hear you ask. Let me try and explain.
Many economists who were predicting a drop in the official cash rate cited reasons such as a slowing local economy, in particular retail, manufacturing, tourism and uncertainty in the global economy.
However, the RBA had a different outlook. Read below for a quote from their most recent “Statement on Monetary Policy”.
“At its February meeting, the Board judged that it was appropriate, for the moment, to hold the cash rate steady at 4.25 per cent, given that the central forecast was for close to trend growth in GDP and inflation being close to target.

The current inflation outlook would, however, provide scope for easier monetary policy should demand conditions weaken materially.”

Basically the RBA are comfortable with the way the Australian economy is tracking but is prepared to decrease the cash rate in the future if it needs to.

If you would like more information on their reasoning, you can check out the RBA website

As mentioned earlier, some of our major retail banks marginally increased their lending rates. I say “marginally” as the 0.06% increase by ANZ and 0.1% increase by Westpac adds less than $6 per week to a typical $300,000 mortgage. Nevertheless, the important aspect to me is not how much they increased their rates by but why did they do so.

If the major Australian banks sourced all their money locally, they should not move rates independently of the RBA. The reality of the matter is, the banks need to borrow some of their money from overseas. The cost of doing this has increased lately, due to the credit crisis in various parts of the world. Banks source approximately 30% of their total funds from overseas. As the cost of sourcing some of their money has increased, they have to pass on this increase to us.

We have no control over what the RBA does, nor the major banks. However, it does help if you can understand why things are happening rather than just wondering what is happening.

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• Written by Peter Koulizos, university lecturer, author and property advocate

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