Higher interest rates ahead

National Australia Bank (NAB) announced it will raise its standard variable mortgage rate by 25 basis points to 5.8 per cent for property investors and by seven points for owner-occupiers to 5.32 per cent. The increased rates are due to take effect next Friday.

Speaking earlier this week, RBA assistant governor Michele Bullock said Australia’s regulatory bodies, including APRA, ASIC, and the Treasury, are watching rising house prices "very carefully”.

Australia’s hot property markets, particularly Sydney, are of particular concern having just experienced a pickup in January. "We're focused on whether things might be procyclical and whether or not there are implications for the resilience of household balance sheets and banking balance sheets as well," Ms Bullock said.

The 25 basis point hike by the US Reserve, the second for the year, had been anticipated as the US appears to be on track to achieve its inflation target, and may continue to put pressure on bank interest rates in Australia. The Fed refrained from incorporating an additional easing of financial conditions into their outlook going forward. Nonetheless, financial conditions will likely continue to be an important part of the Fed’s actions this year.

US Rates increased in 2015 the first in a decade, then one in 2016, and now two in 2017, seem to cement the broad anticipation that global growth may be on the way, leaving some of the commentary to think that there is still potential the Fed will surprise the market, pushing rates even higher than expected.

The Reserve Bank of Australia is still sensitive to local conditions which remain subdued. They'll welcome a fall in the value of the Australian Currency that higher US rates will bring so won't be too quick to increase the cash rate here. However, given their concern about an overheated property market, they'll welcome out of cycle rate hikes from local banks without too much noise.

Given that Australian banks are still funded around 40 per cent from overseas borrowings it's probably safe to conclude we're at the bottom of the current rate cycle and should expect to see a spike in the use of medium term fixed rate loan products while the cheaper rates last.

If you have a investment or other mortgage, now might be the right time to review your rate and see if a fixed rate product might be advantageous to your circumstances.

Call our lending staff and discuss your situation.