As expected, the RBA kept rates on hold today at 1.5%. So once again, attention turned to the bank’s accompanying statement, for clues as to any changes in its outlook.
And for the most part, it was more of the same.
But the RBA did add some new commentary on mortgage lending rates, which caught the attention of financial experts.
Here’s the key line, taken from the penultimate paragraph of today’s statement:
While there may be some further tightening of lending standards, the average mortgage interest rate on outstanding loans is continuing to decline.
The prospect of tighter lending restrictions has been a discussion point since late April, when banking regulator APRA said it expected banks to develop internal portfolio limits on the proportion of new lending at very high debt-to-income levels
UBS economist George Tharenou likened it to macro-prudential “phase 3“, which would create another headwind for borrowers.
However, it was the bank’s discussion of declining interest rates which particularly stood out to some analysts.
For all we know, the RBA’s observation could be a reflection of data, which shows more housing investors switching into principal and interest loans to avoid out-of-cycle rate hikes on interest-only mortgages.
But as economist Stephen Koukoulas pointed out on Twitter, the RBA’s own chart pack from May showed the actual rate on outstanding loans has been edging higher in recent months:
And earlier in its statement, the RBA also highlighted tightening conditions in US short-term money markets.
“The higher rates in the United States have flowed through to higher short-term interest rates in a few other countries, including Australia,” the RBA said.
That’s given rise to upward pressure on funding costs for Australian banks, which itself has been a key talking point in local markets over recent weeks.
Multiple analysts highlighted last week that the rate at which banks lend short-term funding to each other — known as the bank bill swap rate (BBSW) — has been increasing, and also looks set to rise further.
And in a research note on the outlook for lending rates, Credit Suisse said funding costs at current levels have been a good leading indicator for a rise in lending rates.
“If the RBA does not cut rates, we could see out of cycle rate hikes from the major banks,” said CS analyst Damien Boey.
Boey also added that “if the RBA were to hypothetically put through multiple rate cuts in the second half of 2018, the degree of pass through would be very low.”
So ultimately, while the RBA made an effort to point out mortgage interest rates are declining, it appears to stand somewhat in contrast with recent evidence which suggests that, if anything, upward pressure on rates is more likely.
