What rising global interest rates mean for Australians

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While Australia’s interest rate has remained unchanged since August 2016, around the world it’s a different story, with interest rates rising after a prolonged period of record-low rates. Here’s what it means for Australians.

When several major banks lifted their variable mortgage rates in September 2018, it was big news – as interest rate moves always are in Australia. There was criticism from some quarters about this so-called ‘out of cycle’ rate move, with some not sure why banks would make such a move when the Reserve Bank of Australia has kept the official cash rate steady for more than two years.

But as CommSec Senior Economist, Ryan Felsman, explains, there is more than just the cash rate at play when it comes to mortgage rates. Crucially, Australia’s financial system does not exist in a vacuum, what happens overseas can and does affect the interest rates Australian mortgage holders pay. He says Australian banks source about 40% of their funding from overseas, where interest rates are on the rise.

“We’re in a rising interest rate environment broadly and, as a result of that, we’re seeing those out of cycle variable mortgage rate increases,” he says.

Changing global conditions

Globally, he says the unprecedented period of low interest rates and central bank stimulus that came about as a result of the global financial crisis is finally coming to an end, which is having a significant effect on credit markets.

Central banks in the UK, Canada and many emerging markets have all lifted rates, while the European Union is also reining in a massive stimulus program.

The Fed gets moving

But the major impact on global markets has come from the US, where surging economic growth, low unemployment and benign inflation has seen the Federal Reserve shift into rate hike mode at the same time it’s shutting off its own stimulus.

The Fed has lifted rates nine times since the end of 2015, with the Fed Funds Rate now sitting at 2.5% - it's highest level since April 2008. And there are expected to be several more rate hikes in 2019.

However, Felsman says the Fed’s moves would be shaped by the broader US economy, which is expected to slow a little from here, and inflation, which is expected to remain benign, unless President Trump’s tariff hikes push up prices.

“At the end of the day, they aren’t going to have this great big experiment for the past 10 years and then shoot themselves in the foot and lift interest rates too quickly, like they did in 1994, and take the stuffing out of the economy,” says Felsman.

The RBA’s dilemma: to lift or not to lift

Still, any US rate moves will increase funding pressure on Australian banks, who may also have a cash rate hike to deal with this year.

CommSec is forecasting a rate hike in November 2019, though Felsman says that would again depend on how the economy, including the housing market, is tracking.

But he says the Reserve Bank would want to lift rates sooner rather than later, given Australia’s economic growth is currently at a robust 3%.

“If you don’t lift interest rates now, we’re going to be lifting rates into a weakening environment both domestically and globally,” he says.

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Important: This article has been prepared without taking account of the objectives, financial or taxation situation or needs of any particular individual. Before acting on the information, you should consider its appropriateness to your circumstances and if necessary, seek appropriate professional advice. Any information used in this article is for illustrative purposes only.