Despite having successfully fended off calls to taper its cash rates up until now, the Reserve Bank of Australia (RBA) is facing pressure to bring them down as yet another bank increases its interest rates.
RBA Governor Philip Lowe originally said that Australia’s economy was able to cope without rate changes, even as the Royal Commission inquiry threatened to unravel all the progress that the banks had made in the last few years.
After many of the major lenders had their profit margins slashed, they turned to out-of-cycle mortgage rate hikes, and yet again, RBA stood firm. However, with more financiers now upping their rates, the bank is running out of opportunities to maintain the status quo.
This week, UBank, National Australia Bank’s (NAB’s) digital offering, is going to bump up its rates on products with a fixed interest attached to the tune of 20 basis points. UBank is the fourth lender to raise rates in just a week’s time.
According to AMP Capital Chief Economist Shane Oliver, RBA will end up cutting its cash rates sooner rather than later, bringing them down from the 1.5% where they stand now.
RBA’s rates have stayed in place for 28 months, but an increase in funding shortfalls are leaving the banks with a potential black hole of capital that could dramatically affect the Australian economy down the line.
Original predictions by analysts had RBA’s cash rates going up in response to a weakening AUD against its US counterpart. The US Federal Reserve delivered a strong USD in part by keeping up its own stimulus package over time.
However, Oliver said that ‘the gap between the three-month bank bill rate and the expected RBA cash rate has blown out again,’ meaning that rates will have to come down soon to accommodate the change when compared to forecasted results. According to Oliver, the difference ended up being near ‘0.58% compared to a norm of around 0.23%.’
Oliver also said that if RBA’s cash rates remain untouched, then the recent mortgage and interest lending rate rises coupled with a drop in house prices will be problematic for Australian households, which will see their disposable income squeezed even more.
On this basis, Oliver believes that it makes sense for RBA to combat the current economic climate by cutting its cash rates, given that they drive ‘around 65% of bank funding.’ This would provide added liquidity for the market and give the banks more available funding pools, which they could then pass on to consumers. Without a change, there may be a lending gap that causes the economy to spiral even further.
With volatile worldwide markets only adding to the current uncertainty befalling Australia and political elections taking place soon, RBA will be looking to do everything that it can to maintain stability. Although the bank has voiced its disapproval regarding the idea of reducing its cash rates, if interest hikes and a downward trend in housing across the board continue, then it may have little choice.