The Reserve Bank of Australia (RBA) have left rates on hold this Melbourne Cup day, despite announcements by Australias big four banks Westpac, Commonwealth, the Australia and New Zealand Banking Group (ANZ) and National Australia (NAB) that they will raise their variable interest rates next month. This decision, say economists, is based on the RBAs need to assess whether or not independent changes in interest rates will have an impact on the Australian economy.
Plus, while there is growing concern that the announcement of interest rate rises will reduce consumer spending, many economists are speculating whether or not an official cash rate cut would have any impact on the Australian economy as it is highly unlikely that the big four banks would pass on the rate cut to consumers. The announcement made by the big four suggests that the banks will raise their variable interest during November. Westpacs standard rate will jump by .20 basis points, ANZ by .18 basis points, NAB by .17 basis points, and the Commonwealth by .15 basis points.
Why the Big Four Banks Have Increased Variable Interest Rates
The banks have stated that they had to raise interest rates in order to meet the Australian Prudential Regulation Authoritys (APRAs) regulation changes that require them to hold greater capital so that they advert any future financial crisis. However, bank critics suggest that the rate hikes by banks are nothing but shameless cash grabs based on corporate greed, so that the bank shareholders are kept happy. It was noted that on the day of Westpacs announcement of a rate increase that its share price grew during trading hours.
For home owners with a mortgage, the Commonwealth banks rate hike of .15 basis points will add approximately $27 to monthly mortgage repayments on a $300,000 home loan, and almost $45 to a $500,000 loan.
Bank spokespersons have said the move balances their customer and shareholder interests and allows the banks to remain competitive. The NAB said it was taking steps to comply with APRAs rulings by raising its holding capital by $5.5 billion. This comes after NAB announced its annual profit for the 2015 financial year had increased to $6.3 billion, a 20 percent rise on last years figures despite a lower Australian dollar rate.
The Australian Dollar
The dollar value fell after the Commonwealth bank announced that it would be lifting its variable interest rate. At this time, the dollar fell from 72.31US cents to 71.95 cents.
The fall in the Australian dollar was said to be attributed to a fluctuation in interest rates, and fears that the RBA would cut the official cash rate further at its next meeting, which would be less attractive in terms of investment due to a weaker return. However, by leaving rates on hold the RBA are hoping to encourage investment as they wait to see how interest rate rises by the big four affect the Australian economy.
Inflation is Lower than Expected
During the September 2015 quarter, the Consumer Price Index rose by .5 percent to an annual rate of 1.5 percent. This was lower than the RBA estimated, with them aiming for a 2 to 3 percent target.
Economists suggest that pricing power is still weak in the retail sector and consumer confidence is constrained, which could account for lower rates. This is urging retailers to push for a future rate cut so that they can boost Christmas spending and sales figures.
Employment Remains Stable
Regardless of lower consumer confidence, the Australian unemployment rate remains steady at 6.2 percent, despite shedding 5100 jobs during September. Full-time employment fell by 13,900 jobs, while part-time employment increased by 8,900 jobs. The decrease in jobs was unexpected as analysts had forecasted that 9,600 jobs would be added to Australian employment during September.
Economists as suggesting that unemployment forecasts may rise in the lead-up to Christmas due to mortgage rate rises. This, in turn, is expected to have an impact on consumer spending.
The Economic Impact of El Nino
On the weather front, Australia is expected to have one of its hottest summers on record, which could reduce the amount of raw produce grown by Australian farms. This, say meteorologists, is due to Australia experiencing the strongest El Nino its had in 18 years and the ocean temperatures around Indonesia being cooler than usual. This is expected to cut produce growth in 2016 to the weakest its been in 24 years.
Economists fear that drought will result in a reduction in primary produce and put further pressure on an already struggling Australian economy with weak commodity prices and record-low wages in the private sector. Based on this, many economists are predicting that the RBA will be forced to make a rate cut in either December of 2015 or February of 2016.
By leaving rates on hold for now, the RBA have given themselves room for movement in coming months, should economic conditions worsen. This could mean the difference between gaining greater economic stability or Australia standing on shaky ground.
Are you looking to find a competitive home loan that defies the big four rate hikes? Then contact eChoice and discuss your options TODAY. We can help you save more.
Written by eChoice
Since 1998, eChoice has helped more than 50,000 Australians secure a home loan through its network of over 25 lenders and hundreds of loans. Best of all our service is cost and obligation free!