RBA decision announced

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August 2018 

As widely predicted, the Reserve Bank of Australia has today left the official cash rate on hold at 1.50 per cent.

The decision marks 24 consecutive months of the record low interest rate and comes as no surprise given low inflation, record high housing debt, a slack labour market and more recently falling dwelling values.

Although low interest rates bode well for borrowers, rates being low for too long could have negative implications on overall economic and financial stability.

Banks are under pressure to raise their own interest rates ‘out of cycle’ of the RBA as the nations economy fails to improve quickly. Many economists predict that the RBA will not lift rates for the next one to two years, or even longer.

The banking industry is facing increasing stress on its net interest margins (which is essentially the difference between a bank’s interest income and the amount of interest it pays out to lenders). There are surging short-term borrowing costs, in particular the sharply rising 90-day bank bill swap rate (BBSW). This is resulting in a widening spread between the BBSW and the RBA’s official cash rate (1.50 per cent). The BBSW exceeded the RBA’s rate by 43 basis points (0.43pc) in March – averaging out to 52 basis points in July (0.52pc).

BBSW is a short term money market benchmark interest rate. This determines the rate at which the major banks lend short term funding at.

If banks want to preserve their margins, they need to pass on the higher borrowing costs to their mortgage holders.

One of the reasons banks face surging short-term borrowing costs is the Federal Reserve and European Central Bank's policy direction to tighten their monetary policies. Australia is a jurisdiction reliant on foreign capital to help fund our economy because we have a shortage of savings relative to investment.

If the BBSW continues to rise above the RBA's cash rate, banks will need to pass this cost onto consumers through mortgage rate increases.

A number of banks have already lifted their annual home loan rates during July and it is predicted this will continue through the coming months.

For the official RBA article, please visit the Reserve Bank’s website.

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