Rates may rise without RBA action

The ongoing shakeout of global credit markets means that Australian borrowers are less likely to face another 0.25 per cent rise in their home loans from a threatened further hike in official interest rates from the Reserve Bank. But that is not to say some might not see a rise in rates anyway due to a credit squeeze brought on by the US sub-prime lending fiasco.

The US Federal Reserve cut interest rates by half a per cent this week in order to give a boost to American economic activity. This is designed to offset any hit to economic growth caused by the mounting numbers of bad loans to home borrowers who can't make the repayments. It is also to offset the tighter borrowing conditions that have arisen for businesses amid the great uncertainty that has arisen in credit markets.

The direct impact of the sub-prime mortgage problems in the US will be much less in Australia, and our economy is performing more strongly and able to withstand any shocks better anyway. This means the RBA is not likely to be cutting rates like its US counterpart – but will be more inclined to hold off any rate rises we might have had for keeping inflation under control. The RBA believes inflation is still the main risk to the Australian economy amid our buoyant economic conditions.

RBA governor Glenn Stevens hinted in a speech to the Asia Society this week that the credit squeeze is in some ways actually a good thing for Australia, saying “some additional restraint would perhaps not be unwelcome”, acting just like an official interest rate rise would.

There has in fact already been a de facto rate rise in Australia as loan funds become harder to get, raising wholesale interest rates. However, this has flowed through to rates for business borrowers more than home borrowers so far. But some home lenders – those sourcing their loan funds from international money markets – are having to raise their variable interest rates by a tenth of a percentage point or so. How many will eventually have to, and by how much overall, is hard to know. Stevens seems to believe that the problems for local credit markets aren't that great although uncertainty will continue for a few months.

Borrowers with home loans from smaller lenders may be more at risk but the highly competitive home loan market means all lenders will be trying hard to limit any rises.