Have you got a mortgage?
Beware! Your interest rates are on the rise and it has nothing to do with the Reserve Bank changes in official rates.
Higher mortgage rates are starting to flow because the banks are confronting higher borrowing costs because of a jump in money market interest rates that has been linked to the interest rate hikes in the US and a tightening in global credit conditions.
For owner-occupier loans, the Bank of Queensland has announced an increase of 9 basis points (0.09 percentage points) for principal and interest rate loans and 15 basis points move for interest only loans.
The other banks are certain to follow as they struggle to maintain their net interest margins in the wake of the surge in the cost of capital.
While 10 or 15 basis points doesn’t sound like a significant change in borrowing costs, it is about to hit borrowers repayment schedules at a time when household incomes are already being squeezed by near record low wages growth, an uncertain outlook for employment, falling wealth as the house price cycle turns lower and low savings.
A 10 basis point interest rate rise will, for example, add $500 a year to the interest cost on a $500,000 mortgage. That is $500 that will not be spent in the economy as mortgage holders increase their repayments.
And that might just be the start of it.
Unless the market conditions change in the next month or so, further increases would seem assured.
Of course, the RBA could act to offset this negative influence on the economy with a cut in official interest rates.
A 25 basis point cut in official rates to 1.25 per cent would broadly neutralise the current pressures on bank margins. Such a cut would certainly not be be passed on to consumers in full, if at all, which means that the overall stance of monetary policy would be little changed, rather than more restrictive as is currently the case as the rate rises flow through.
At the moment, there seems little hope of this with the RBA Governor Phillip Lowe suggesting that the next move in official rates is more likely to be up than down.
Lowe seems wedded to this view, notwithstanding a raft of data showing the economy just muddling along, with weakness in housing, wages and consumer spending. Importantly, inflation remains below the RBA target which means there is scope for lower official interest rates on macroeconomic grounds over and above the recent uptick in bank borrowing costs and lending rates.
Economic conditions over the second half of 2018 and into 2019 are increasingly fragile.
With the debate over the upcoming election throwing up uncertainty on tax policy, business and consumers alike risk hunkering down with their borrowing, spending and investing until the election is held and the new government formed.
House prices are falling and there is no end in sight to the declines. The out of cycle bank interest rate rises will only exacerbate the price weakness which threatens to reduce the wealth of home owners which will have consequences for spending and new spending.
Managing the economy is not easy and pragmatism must prevail.
In the past, the RBA has shown such pragmatism with unexpected changes in interest rates being delivered when there have been unexpected changed in economic conditions.
In the mean time, get set to pay more for your mortgage and watch closely for a change in view from the RBA once it realizes the economy is not quite as strong as it wished for.