Are interest rates about to go up?

Australia’s banks are probably a month away from deciding if they’re going to increase interest rates once again, deciding between being popular or being profitable.

The three-month bank bill swap rate, which Australian banks use to gauge borrowing costs, rose one quarter of one per cent in March, the biggest monthly gain since September 2010. This is being driven by a number of factors including increases to US interest rates and changes to bank regulations here in Australia.

However, most of the movement is due to the economic uncertainty around the US-China trade 'war of words'. While it is currently very heated, it's hoped this exchange will settle to a more normal discussion and if so, the bill rate might ease back a little. If it doesn’t, the banks will have few options.

The first is to bear the higher costs, which would squeeze their margins and reduce their profits. The second is to reduce the interest paid on deposits, and the third would be to hike interest rates on loans to customers, particularly home loans.

Most analysts think the banks will bear the current margin squeeze for at least another month before it erodes their profits to such an extent that they’ll feel compelled to act. Although recently, and without fanfare, Suncorp increased their standard variable home loan rate by 0.05 per cent.

It should be noted, the lift in Bank Bill Swap rates has nothing to do with the Reserve Bank Cash Rate which is expected to remain stable for at least the next six months.

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(Source: Sydney Morning Herald; Your Mortgage Magazine)