We have had a few banks increase their fixed term rates in the past two weeks and this mainly around the 3-5 year terms. With the commentary from our Reserve Bank pointing to a low OCR till next year it is easy to understand why many of our clients are only fixing for the short term. With the economy cooling across the ditch, the Australian Reserve Bank is also keeping its rates low.
Global sentiment also plays a major part in the fixed term rates as well and we see some things on the horizon which seem to point to increases ahead. In the past few months wholesale rates have been making a move and this has been the cause for some recent upward movement in the 3 to 5 year fixed terms.
Here are some of the factors which may change things for our home loan rates.
China’s easy lending
The PBOC or People’s Bank of China (the central bank) has been making some noises about slowing down the speculative lending carried out by Chinese bankers; Mid June a quick tap of the brakes by the central bank led to a sharp increase in the costs of interbank funding temporarily. There has been much talk about the Chinese economy slowing down; at the same time the top brass is looking at ramping up the domestic consumption to wean off reliance on exports and investment. Moving to more market based rates could be one way for this to happen; potentially increasing the cost of funds.
Fed Reserve – U.S to slow down the printing press
The Federal Reserve in the U.S has been making some grumblings about slowing down how quickly it prints money, currently the press is running to the tune of 85 billion a month. Some indications are that this might happen in the following year or two; although unemployment would ideally have to fall below the 7% mark. This slow down may also have a flow on effect on the cost of borrowing abroad.
Borrowing from abroad – higher costs?
International regulators have been talking about changing how the Australian banks raise money abroad, pointing to introducing a margin on cross-currency swap deals as a way to limit excessive risk taking and reduce systemic risk. This has some major implications for the Aussie banks as around a fifth of their funding is through foreign currencies. The major banks are having a healthy talk to international regulators about the increase in the costs of borrowings, which would probably be passed on to the end consumer.
All in all there are a few things out in the horizon which seems to spell an increase in the costs from borrowing from abroad. We wonder about the implications of the Reserve Bank and its unfavourable treatment of low deposit buyers – could this mean increased competition from the banks to retain home owners with good equity and hence better rates for some? If the new changes by the Reserve Bank cool the housing market, will they need to raise the OCR so quickly? Also with some of our major trade partners slowing some signs of a slow down, short term rates could stay attractive.
