ANZ Explains home loan interest rate rise

Yesterday’s decision by the RBA to lift the cash rate for the second consecutive month by 25bp to 4.25% is another step in the policy normalisation process.
Moreover, the statement accompanying the change in policy suggests there has been no significant change in the Bank’s thinking around the need to return policy to a more normal setting.
The Bank referred to the strength of the house price growth early this year and this follows on from last month’s statement that referred to the strength last year’s growth in house prices. Clearly, over the past couple of months the housing market has become an important consideration for monetary policy and policy may need to respond further if house prices continue to rise rapidly.
Another change from last month’s statement is the Bank’s reference to the rise in the terms of trade. The recent large contract price increases for both metallurgical coal and iron ore producers will add to income this year and stimulate strong growth in investment in the resources sector. The key risk around such a strong outlook in mining investment is inflation and this will keep the Bank in play over the longer term.
Another significant change to the wording of the statement is around the level of lending rates. This month the Bank stated that interest rates to borrowers “have been somewhat lower than average”. The Bank stated last month that “interest rates to most borrowers nonetheless remain lower than average”. The past tense reference this month suggests that the Bank believes that policy is now close to normal. Moreover, the general tone of the statement suggests that the RBA is in no rush to raise rates aggressively going forward.
Today’s move following the move last month probably gives the RBA some time to assess the impact of the 50bp increase in the cash rate this year. We expect that the Q1 underlying inflation outcome will be consistent with the Bank’s view that it will continue to ease back to around the middle of the target band and if this is the case, a move in May would be unlikely. We expect the next move by the RBA to be at the July meeting and that the cash rate will be 5% at year end.
Source ANZ Economics and Markets Research



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