Add CategoryThe US Federal Reserve is scheduled to convene this week, and it’s more or less a foregone conclusion they’ll be raising interest rates—the third time they’ve done so in a decade.
With markets pricing in two more rises (in July and December), it’s likely that by year’s end, Australian banks will be paying around 0.75 percentage points more for each dollar they borrow short-term from abroad (the bond markets that determine global rates follow the Federal Reserve, but don’t track it precisely).
This increase in borrowing costs will place an additional burden on the Australian economy and will likely inflate mortgage rates.
Australian banks are masters at passing on higher costs, and it’s highly likely they’ll start raising rates independent of the Reserve Bank of Australia within the next few months.
Digging ourselves into a hole with debt
Australia’s national debt rose above $1trn for the first time about a year ago, and the country now has the second-highest household debt in the world. While a quarter of this is government debt, the vast bulk is private debt. Most of this private debt was raised by the banks to fuel the greatest residential housing boom in Australia’s history.
A rise in US interest rates will make it more expensive for Aussie banks to raise cash. Consequentially, they’ll attempt to pass off higher costs to borrowers as they go about refinance existing debt and raising new cash.
Rate rise will be keenly felt by the mortgage belt
The increase in borrowing costs will not be felt equally throughout the country.
Renters with only minor personal debts will not feel much change. In fact, record numbers of new rental dwellings coming onto the market nationwide might take a little pressure off their budgets.
Older Aussies who’ve paid off their homes could also benefit from US rate rises. As wholesale funding costs increase, the banks will pay more to raise local deposits, and those with substantial cash savings will collect higher interest payments.
But in between the one third of households who rent and the one third who’ve paid off their mortgages is the so-called mortgage belt. Rate rises would eat into the budgets and drain the hard-earned incomes of households that fall under this category.
It is this group that will experience the most hardship if Federal Reserve Chair Janet Yellen goes against President Donald Trump’s wishes and raises interest rates.
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