Well, yesterday saw the Reserve Bank holding interest rates steady for another month, but even so there have been solid rumouring that banks will increase interest rates any way, causing more consternation for mortgaged up Australians.
The Evidence
This possible highly likely decision by banks to raise their interest rates ahead of any Reserve Bank increase is now being backed up by evidence, with both the Commonwealth and Westpac banks warning that due to wholesale funding costs increasing (they have increased 0.20 to 0.80 percentage points in the past two months) there is pressure on them to increase their own rates.
Why Is This Happening?
The main reason for the increase in wholesale cost is the troubling European crisis, which seems to be on-going and looks like staying that way for some time to come, possibly dragging the rest of the world down with it (double-dip recession, anyone?)
To Put It Simply
If you don’t know the difference between cash rates and wholesale rates don’t worry too much. Basically, the wholesale rate is the rate at which banks borrow money to fund themselves. When this increases it costs them more to borrow the same amount of money – just like it costs you more to repay your mortgage when your interest rate goes up.
When that happens, banks worry about the cost to them (and ultimately their profitability) and pass on the costs to you, the mortgage holder.
So, The Banks Are Evil?
Well, yes and no. It’s a very complex argument but sometimes the banks are justified increasing their rates above the standard cash rate, but sometimes they are not. And when politicians denounce them for doing so, they are usually just playing politics as sometimes they know full well the increase is justified.
Your Situation
Although, it all depends on your point of view and situation. If you are a Commonwealth Bank shareholder with no mortgage you would damn well want them to pass on the wholesale interest rate rises as it is better for the business, but if you are a struggling family trying hard to pay off your mortgage you will be unlikely to see it that way.
But that’s life. And the best thing you can do is plan, budget, and save like crazy so that you can absorb these cost increases when they arise.
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