Home loan interest rates: brace for the Donald Trump effect
Donald Trump’s second stint at being US President could have more of an impact on your money than you think. Here’s why.
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It’s a crazy world when the election of Donald Trump as US President can impact the mortgage interest you pay.
In fact, it’s a crazy world when Donald Trump gets elected full stop after riots, court cases and convictions since 2021. Yet it’s happened, the US people have spoken, democracy wins and everyone’s in for a wild and unpredictable ride over the next four years.
Financial markets have started pushing back forecasts for Reserve Bank interest rate cuts following Mr Trump’s election victory, and there is an increasing chance we may not see any rate cuts during 2025.
How on Earth can Trump force you to pay higher home loan interest, you may ask?
It’s all because of the weird way in which governments, economies and financial markets are linked globally, and more specifically because Trump’s election policies would increase inflation.
The Reserve Bank of Australia’s official interest rate has been steady for a year at 4.35 per cent, despite other places such as Britain, the US, Canada, Europe and New Zealand cutting rates in recent months.
The RBA’s US equivalent, the Federal Reserve, cut its official rate 0.25 percentage points a week ago, after a 0.5 percentage point cut in September.
Central banks raise interest rates to slow inflation growth, and they cut them when inflation drops too far. In Australia, underlying inflation is still high and above the RBA’s 2-3 per cent target band.
There’s an increasing chance it won’t get within that range soon.
That’s because Trump plans to reduce taxes, increase spending in the US economy and slap huge tariffs – taxes – on goods coming into the US from overseas, particularly China. All of those measures are inflation-boosters, and inflation in the world’s biggest economy can spread everywhere.
KPMG has modelled the impact of Trump’s proposed policies on Australia and found they could potentially hit our economic growth by 1.5 per cent – not a nice thought given our economic growth for all of 2023-24 was only 1.5 per cent.
Inflation could rise, too, if Trump proceeds with plans to slap 10 per cent tariffs on all imports to the US and a 60 per cent tariff of Chinese tariffs, sparking a trade war.
“The net effect of the direct increase in tariffs on US imports and the indirect effects of flow through impacts is a projected increase in domestic inflation of around 1 per cent if Australia is treated no differently to the rest of the world,” KPMG chief economist Brendan Rynne says.
He says even if the US lets off its good mate Australia when it comes to tariffs, our inflation could still be 0.8 per cent higher and make the RBA’s job “a lot harder”, he says.
So what do you do with your mortgage?
Be as disciplined as you can, refinance to a lower rate where possible, and hang tough.
Remember that financial markets were forecasting 2024 rate cuts from mid-to-late 2023, so they don’t have a successful recent record. If they start predicting that there will be no rate cuts, perhaps borrowers will get some.
Yes, it’s a crazy world.
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Originally published as Home loan interest rates: brace for the Donald Trump effect
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