Are interest rates about to go up?

Australia’s banks are about a month away from deciding if they’re going to increase interest rates once again—essentially deciding between “profits versus popularity,” according to writer Elizabeth Knight of The Sydney Morning Herald.

“For the past couple of months, the banks’ wholesale cost of borrowing funds has risen to a level, which, on an annualised basis, would cost the biggest ones up to an extra $500 million a year,” Knight said. “Inside the banks, executives are sweating it out, hoping the rate they pay to borrow - the three-month bank bill rate - will come back down.”

If it doesn’t, the banks have few options. The first is to bear the higher costs, which would squeeze their margins and reduce their profits. The second is to reduce the interest paid on deposits, and the third would be to hike interest rates on loans to customers, particularly home loans.

Also read: Aussie households are vulnerable to rising global interest rates

Many analysts think the banks will bear the current margin squeeze for at least another month before it erodes their profits to such an extent that they’ll feel compelled to act.

“Which of the major banks will want to be the first to increase rates in the middle of a Royal Commission at which their unacceptable behaviour towards customers has placed them firmly in an unflattering spotlight and the centre of a public relations nightmare?” Knight asked.

Neither can the banks fall in step with the Reserve Bank, which has once again kept the official cash rate on hold at 1.5% in April.

“Banks could respond by decreasing their funding costs in other ways - such as lowering deposit rates,” Knight said. “It is an unpopular move but doesn’t generally receive anywhere near the public scorn that raising mortgage rates does. Or they might just hold out a little longer than usual, hoping that the three-month bank bill rates will come down.”