The markets are tipping one final fling by the Reserve Bank with a rate cut in April next year.
And credit where it’s due, since it was entertaining an official cash rate of 2 per cent, where it is, when economists were predicting it would rise this year.
But if it is right again the banks won’t be following suit because, frankly, they don’t have to.
Did you notice there hasn’t been a peep out of politicians since some banks lifted their investment loan rates by 0.27 per cent across the board? Reserve Bank governor Glenn Stevens even gave them a tick.
They didn’t even have to hide behind new borrowers by only increasing their rate, though they’ll still be hit harder than the banks are letting on.
As the cost of an investment loan rises 0.27 per cent, the banks are simultaneously cutting the discount on the advertised rate by the same amount for new borrowers. That’s a rate rise of 0.54 per cent on new investment loans without so much as a by your leave.
All investors are being slugged, but then the banks probably figure who likes landlords anyway? Except them, of course.
The banks also have a nice line going when lending to DIY super funds. These have to be non-recourse loans, so they have less security for the banks. Fair enough, the rate is higher again.
But the sneaky thing is if the property is negatively geared in the fund the banks will also ask the trustee to be guarantor – in effect making it a normal, safe as houses, loan. Or as a mortgage broker put it to me, “They get their hooks into members’ assets outside super”.
Anyway, the banks are plugging a potential leak from their profits arising from the new capital regulations to bring them up to scratch against their international peers.
The more capital they have to hold, which earns next to nothing, the less they can lend at a typical profit margin of 40 per cent.
But the real problem for borrowers is further afield. There’s a race between when the Federal Reserve in the US will raise its rate and the Reserve lowers its, the outcome of which will affect the banks’ funding costs.
Money markets are, um, banking on the Fed lifting in December, though economists are opting for it at the September meeting.
Unlike the Reserve the Fed publishes its interest rate forecasts. They’re higher than the market is pricing so one of them is going to be wrong, a potential problem in itself.
If the markets have it wrong – as the most recent economic statistics suggest – on their past form they’ll panic and push yields higher than even the Fed intended. The damage wouldn’t stop there either. The shockwaves would spread to sharemarkets as well.
Since the US bond yield is the rock bottom, risk-free benchmark for all, other rates need to rise at least as much as well.
It’ll be the perfect cover for the banks to avoid a rate cut next year.