December 6, 2016 by Dymphna 11 Comments

A rate hike just in time for X-mas… thanks, bastards!


What’s behind the latest rate hikes.

There’s a growing list of banks hiking interest rates just in time for Christmas.

Banks tend to move (and hunt) in packs, so you can expect more of the herd to follow.

It started with increases to fixed-rate mortgages. Last week CBA led a host of smaller banks in increasing fixed rate offerings. From the AFR:

Commonwealth Bank of Australia, the nation’s largest lender, is increasing rates on fixed term owner occupied and investment loans by up to 65 basis points, the latest of the majors to respond to rising international funding costs caused by the ‘Trump effect’, tougher underwriting standards and tighter rules.

That was then followed by Westpac and NAB lifting their variable mortgage rates, although not so dramatically. Again from the AFR:

Westpac is lifting variable interest rates on new and existing interest-only home loans, the bank has confirmed.

The changes will come into effect December 16. The bank is said to be raising the standard variable rate by 8 basis points on interest-only home and investment loans.

… NAB has also said it will increase its variable rates on new and existing residential investor home loans by 0.15% per annum, effective from Monday 12 December 2016.

This will mean NAB’s Variable Rate for Residential Investment Home Loans will be 5.55% per annum.

There is no change to NAB’s Variable Rate for Home Loans (Standard Variable Rate) for owner occupier customers, which remains at 5.25% p.a.

… The lenders are the latest of the majors to respond to rising international funding costs caused by the ‘Trump effect’, tougher underwriting standards and tighter rules.

This is all a bit whiffy to me.

The narrative here is that banks are facing a tougher funding environment, thanks to the “Trump Effect”, and so simply have no choice but to pass on those pressures to consumers.

What can we do? Our hands are tied.

But let’s stop and have a look at this for a minute.

First up, what is this “Trump Effect”? The idea is that global markets are so rattled by the idea of wildcard President Trump, that global capital is now moving with a premium.

This is the usual response to disasters – like the Greek crisis and what have you…

But so far, Trump is all that much of a disaster. I mean the American stock market shrugged off the victory and stormed to record highs. Gold – your classic safehaven play – is still getting hammered.

So is there really all this ‘uncertainty’ around Trump?

And even if there is, you’re not seeing it in bank funding costs. This chart here compares funding costs for CBA against similar banks in America and Europe.


So sure, there’s been a tiny tick-up lately, but its hardly breaking out.

So I’m not sure I’m buying this uncertainty story.

It is true that for some reason, the herd changed its mind on rates, pretty much overnight, with Trump’s election. Here’s the market betting on interest rates before Trump and after Trump.


You can see it’s a pretty radical shift. From locked in lower rates to the next move being up.

But this story is totally disconnected from the realities facing the Australian economy. In my mind, there are three main drivers of interest rates: inflation, unemployment and the Aussie dollar.

Inflation currently sits a full percentage point below the RBA’s target mid point. There’s absolutely no case for raising rates here.

On employment, jobs data remains soft. If a bunch of people hadn’t just given up looking for work since March, unemployment would be at a 5 year high and on a quick march higher.


And the exchange rate remains stubbornly high, despite US Dollar strength around the world.

So with inflation well below the target band, unemployment rising quickly, and the Aussie dollar stuck in the uncomfortable zone, it is very hard for me to see any case for raising rates in the foreseeable future.

But that didn’t stop the herd turning on a dime with President Trump.

(Wouldn’t be the first time that the herd got it wrong.)

And so when the banks point to increasing funding costs, and the upward momentum in official interest rates, I see a lot of media speculation, but not much evidence.

And really, it just looks like banks are being a bit opportunistic here. No one really knows what’s happening. This ‘Trump Effect’ stuff gives us a nice cover. Let’s jack rates a little and protect our margins.

C’mon Dymphna, aren’t you being a little cynical?

Maybe. But I’m not the Grinch who stole Christmas.

Are the banks yanking our chain?