Cold comfort on rates from the RBA

It may be of no great consolation to borrowers now paying upwards of 9 per cent on their home loans, but the string of rises from lenders above the increases in the official cash rate by the Reserve Bank (RBA) doesn’t necessarily mean we’re paying more than if rate rises were confined to just those official increases.

In a speech to the financial industry this week, RBA governor Glenn Stevens all but confirmed that the banks and non-bank home lenders had been helping the RBA do its job in cooling the economy by making their own unilateral rate moves.

While for most of the past decade market interest rates have moved closely in line with the RBA’s official rate, the global credit crunch means that relationship is not nearly so tight at the moment, Stevens said. “Of course, in setting the cash rate, the Reserve Bank has taken account of these shifting relationships,” he added.

That probably means one thing. If the lenders hadn’t been raising rates themselves, the RBA would by now have been forced to raise official rates further and retail home loan rates would have reached the same level anyway.

What’s more Stevens said that the best thing for Australians in these uncertain financial times is that banks DO raise their interest rates unilaterally. Australia’s banking system remains strong and is well-placed to weather the international turmoil. Banks raising rates to cover increased costs of funding is the best way to keep it that way.

Stevens’ speech signals the RBA continues to be more concerned by inflation and the excessive spending going on in the economy than the threat of US recession and global economic downturn. That suggests the RBA retains its leaning towards raising interest rates further.

Cold comfort all round from the Governor for beleaguered home borrowers.

There’s perhaps one light on the horizon in the fall in job vacancies over the three months to February. Down 2.5 per cent seasonally adjusted, it’s the first fall since mid 2006 signalling the job market may finally be peaking. This is a prerequisite for any turning in the interest rate cycle given it’s the jobs boom more than anything else that has been driving the excess demand and inflation threat.

Infochoice.com.au