The three rate amigos

HOME loan interest rates are going up. Will they keep rising and if so, how high will they go, asks Terry McCrann.

Reserve Bank governor Philip Lowe has yet to touch the rate lever.

HOME loan interest rates are going up. Will they keep rising and if so, how high will they go?

The answers lie not just with the banks — which have been making what used to be called “out of cycle” rate hikes. Or even with Reserve Bank governor Philip Lowe, who is seen as the one all-powerful man with his hand on “the rate lever”.

The answers are in fact broadly in the control of three rate amigos — Lowe (and RBA management and board) of course, but also Fed head Janet Yellen and European Central Bank boss Mario Draghi.

But I said “broadly”, because none of them — and not even the three together — can play “rate dictator”, just setting whatever official rate they want and then forcing the actual bank lenders to follow.

Indeed we can see that very clearly in the local case alone. Lowe hasn’t touched his “rate lever” all year (and won’t, again, next Tuesday either — just to get that out of the road).

Indeed, he has yet to touch the lever at all since becoming RBA governor last September. His predecessor Glenn Stevens oversaw (reluctantly) the last cut in the official rate in August. Yet, despite that, the banks, as noted, have been hiking.

Lowe and the rest of the RBA — and indeed his counterpart, Wayne Byres at APRA, the regulator (not as many might assume, the RBA) actually charged with ensuring banks and other financial institutions don’t get into difficulty — would be far, probably very far, from being upset.

The reason for the hikes is — mostly — simple and entirely justifiable. The banks get 30-35 per cent of their money from the global market. The rates they have to pay for that money have been rising.

So, while yes, the RBA’s official rate hasn’t shifted — and that mostly determines what they pay for the other 60-65 per cent of their money — their overall cost-of-funds has been going up. That justifies putting up their lending rates. The second, lesser, reason the banks have been hiking is more problematic. A year ago the big banks were required to hold more capital against their home loans. That reduced their profitability; they’ve mostly had two goes at hiking to claw some profit back.

Federal Reserve Board chairman Janet Yellen. Picture: AFP

Now, the biggest hikes have been on loans to investors and on the fixed-term type. That has protected owner-occupiers and would have made both the RBA and APRA happy. Although it costs the taxpayer through negative gearing.

RBA/APRA want the banks to cut back on their lending to investors, which they have also been doing. The duo is also happy to see existing investors pay more on their loans, also reducing their appetite for further borrowing.

The RBA in particular doesn’t want to discourage investor-borrowing by raising its official rate and so hitting all borrowers. Indeed, the RBA has no wish to raise its official rate at all. Inflation is comfortably low and the jobless rate while not high is still too close to 6 per cent for comfort. Equally, the RBA does not want to cut its rate; and so pour more fuel on the property market. Indeed an official rate cut would in one hit undo all the ‘good work’ that those investor rate hikes have achieved.

While the economy (outside property) is not booming; it’s doing broadly OK. In any event another rate cut would not send business on an investment and job-hiring spree.

It’s not the cost of money that’s the problem, it’s power prices, gas availability and general lack of competitiveness.

THE RBA can’t do much about those, but it will be expecting its two amigos to do something useful: Yellen by raising US rates and Draghi by doing nothing.

So while our RBA meets on Tuesday (and, to repeat, will do nothing), the far more impactful meeting also happens next week — over Tuesday-Wednesday in Washington. That makes the next two early Thursday mornings our time, truly awesome. That’s when next week the Fed announces its rate decision. This week it is when President Trump unveils his big tax cut package. It should seal a Fed hike.

The only thing that could make Yellen keep postponing a hike is either a market slump or fear of such a slump. The tax package announcement combined with the French election result have done the exact opposite; they’ve set global markets alight.

European Central Bank president Mario Draghi. Picture: AFP

Yes, a US rate hike would generate more local home loan rate hikes like we’ve seen in recent weeks, But they would be focused on investor loans, which isn’t so painful because of the tax deduction. Also, to (necessarily) state the obvious, a higher rate on a fixed term only applies when the loan rolls over or for a new borrower. Rising rates in the US thus, won’t hurt Aussie borrowers that much. But the plus will be felt, hopefully, in a lower Aussie dollar.

Our RBA is in no rush to apply a rate hike that would flow to all borrowers. But a world in which US rates were rising because of a strong US economy would give our RBA rate flexibility, as well as being good for our economy. All that would also work to reduce the risk of a property market collapse while hopefully taking the heat out of the market.

The “third Amigo”, incidentally, also isn’t going to do anything with European rates anytime soon. That’s also broadly helpful to us.

WHERE’S OUR

TREASURER?

WHATEVER happened to Treasurer Scott Morrison? Do we need to hit the “Missing Minister app” to find him?

He’s certainly not on the Ray Hadley radio program — that gig’s gone to the “minister” very definitely without portfolio, Tony Abbott.

And we know where Malcolm Turnbull is — on one of those regular “surprise” visits to the troops in the Middle East. But two weeks out from the Budget, where’s the Treasurer laying the groundwork for the “do-or-die” Budget? Either by talking of the broad imperatives or “road-testing” initiatives in the time-honoured, usually sneaky, way?

After the one go at suggesting it would contain a “housing affordability package”, that and everything else has gone quiet.

Maybe he’s got another superannuation-style blockbuster up his sleeve. Maybe he’s just taken the PM at his word — actually, both their words, if his said through grinning but gritted teeth — that it would be the PM fronting the budget sale.

The RBA is going to — appropriately — do nothing next Tuesday. Why do I feel PM and Treasurer are going to take that as “their cue” for the Tuesday after that? If so, perhaps surprisingly, probably no disastrously bad thing.

Originally published as The three rate amigos