Mortgage rates could rise even if the RBA keeps the cash rate on hold

In a week filled with major news events, including the US Federal Reserve’s benchmark interest rate hike and the Cambridge Analytica scandal, the news that Suncorp Bank would lift its owner-occupier mortgage rate by 0.05 percentage points to a standard rate of 5.6% hardly merits a mention.  

“If the size of the lift was unimpressive, the reason for it is worth our attention,” said Patrick Commins, markets deputy editor for The Australian Financial Review.

David Carter, chief executive officer of banking and wealth at Suncorp, said the decision to hike rates was based on the rising cost of funding, the costs associated with regulatory changes, and the US interest rate hikes.

“We have seen the key base cost of funding, being the three-month bank bill swap rate, rise approximately 0.2 [percentage points]. This increase results in higher interest costs to our wholesale funding, as well as our retail funding portfolio, such as term deposits,” Carter said in a statement.

Indeed, since late last year, the bank bill swap rate (BBSW) has risen by 0.25 percentage points after sharply accelerating in February.

“You may have heard about the BBSW for a couple of reasons. First off, it's the one the banks have been rigging to their own advantage for a number of years,” Commins said. “The other notable thing about the BBSW is that it is the reference point used to set interest rates on most business loans, and also flows through to personal lending rates.”

As a result, over the past few months, Australian companies with exposure to variable-rate loans have just received the equivalent of a rate hike, according to Martin Whetton, interest rates strategist at Australia and New Zealand Banking Group (ANZ).

Whetton added that the lift in the BBSW “has nothing to do with the RBA cash rate,” which is expected to remain stable for at least the next six months, and has “almost nothing to do with what the Fed’s doing.” Instead, the “unintended consequences” of American policies have worked to push short-end rates higher and prices lower.

“That all sounds confusing, and it is,” Commins said. “And there have been other factors as well. But the key takeaway is that funding costs in Australia are going up at a time when the RBA is stuck in neutral. It highlights how what happens with rates and in money markets overseas, and particularly in the US, can have repercussions here – repercussions that many are possibly unprepared for.”

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