Australia and New Zealand Banking Group and National Australia Bank of Australia (NAB), both increased their fixed interest rate home loan loans last Wednesday.

Meanwhile, the central bank cash rate has stood at a record low of 1.5% since August, and economists remain divided as to whether the RBA’s next move will be another rate cut or a rate hike. 

“The banks’ interest rate increases may well be a gift to the Reserve Bank of Australia, giving it flexibility to reduce the benchmark interest rate without worrying about further fuelling the overheated housing market,” said Narayanan Somasundaram in an opinion piece for Business Insider Australia.

Somasundaram lists five reasons why Reserve Bank may favor slightly higher mortgage rates, and why banks might shift rates independently from the Reserve Bank.

  • The RBA aims to promote financial stability.
  • Philip Lowe, governor of the RBA, has expressed his reluctance to drop rates further for fear of worsening the nation’s surging property prices and record levels of household debt. “Banks increasing interest rates soothes some of these fears and gives room for the RBA to act if inflation drops further or the economy needs a boost,” Somasundaram said.  

  • RBA would like to keep cash rate at current level.
  • If banks start increasing their interest rates, then they’re essentially doing their part to cool the Aussie residential property market, which registered a 10.9% growth last year, according to data from CoreLogic. If banks do their bit, the RBA may allow the cash rate at 1.5% to continue to benefit the non-residential sector of the economy.

  • The cost of financing home loans is increasing.
  • Australian banks are seeing rising funding costs due to the US’s increased rates and higher global bond yields. Non-deposits (or money from credit markets) account for a third of the largest Australian banks’ funding needs, and the spreads are starting to rise. This is forcing banks to pay more attention their lending rates.

    “There are a range of factors that influence the funding that NAB – and all Australian banks – source, so we can provide home loans to our customers,” Antony Cahill, NAB’s chief operating officer, said in a recent statement. “The cost of providing our fixed rate home loans has increased over recent months.”

  • The banks want to be profitable in lending.
  • Morningstar’s Banking Analyst David Ellis believes banks will soon raise variable rates on mortgages. These rate increases account for 25% in home loans outstanding. This measure is crucial for lending profitability because banks try to offset rising funding costs while protecting their interest margins. Somasundaram stated that this measure is at its lowest point in more than a decade, due to increased competition and record-low lending rates.

  • Banks monitor their lending rates. 
  • After seven consecutive years of record profits growth banks are now experiencing a slowdown. This is due to increased competition as well as corporate bad loans. Additionally, capital requirements are rising because of global regulatory measures designed to prevent another global financial crisis.

    “With banks already capping their dividend payout ratios to boost retained earnings, they are also expected to be less generous with lending rates,” Somasundaram said.