Although the Reserve Bank is firmly “on hold” when it comes to the cash rate – which has been stuck at 1.5% for 21 consecutive meetings of the RBA Board – term deposit rates are inching higher and are set to go higher. That’s the good news for investors.
The bad news for share investors is that the banks are facing higher short-term borrowing costs and their net interest margin is under pressure. While many of the smaller banks are passing the higher costs on to their borrowers (for example, AMP increased their owner-occupied home loan rate last week by eight basis points and their investor rate by 17 basis points, while Macquarie increased their rates by six basis points and 10 basis points respectively), with the Royal Commission in full swing, the major banks are reluctant to follow suit. Higher short-term rates also mean that listed companies are paying more on their debt.
Why have short-term rates gone up? It is hard to be definitive about the cause. Some argue that due to the strength of the US dollar, President Trump’s company tax cuts and the US Treasury issuing more treasury bills, there is a global movement of funds back into US dollars. Many US companies are also reported to be re-patriating funds back into the USA. The blowout of spreads in Australia and other countries is largely following what is occurring in the USA.