Money and Finance

Interest Rates will Rise

The RBA has kept the official cash rate on hold at 1.5% this month, continuing its longest run of low interest rates.

This marks the 18th consecutive month the RBA has kept the rate steady since it cut the official cash rate by 25 basis points in August 2016.

The question is, how much longer will rates run at an official low?

There are two factors that cause banks to increase rates.

Firstly, APRA has mandated the big 4 to increase their capital holding requirements. APRA wants Australian banks to have stronger balance sheets. Holding more capital means the banks have to reserve more cash that they can no longer use for making profits. This is an added cost to the banks, which they will pass on to their mortgage holders so they can continue producing healthy shareholder returns.

Secondly, the cost of funds is more expensive for banks to source from overseas. We’ve seen the cost of funding increase by almost 40% for some banks.

The reality of this regulatory change and cost of funding will create a domino effect. That is mortgage customers will become more savvy and source cheaper alternatives to the big 4 as the smaller banks don’t have the same capital pressures.

For mortgage holders, it is a good time to refinance and get ahead on your mortgage repayments, so you have a buffer for when interest rates rise.

Rates are the lowest in living memory but will not stay like this which means fortifying your funds and taking control in the face of uncertainty.

There are considerable risks too of leaving interest rates at record lows, including potential not pricing for risk and asset bubbles.