Oz set for monetary tightening – though the RBA won't hike anytime soon Oz set for monetary tightening – though the RBA won't hike anytime soon Oz set for monetary tightening – though the RBA won't hike anytime soon

Oz set for monetary tightening – though the RBA won't hike anytime soon


Funding pressure may see Australian commercial banks raise mortgage rates even though Reserve Bank of Australia won’t be increasing the official cash rate any time soon. Weak wage growth and lacklustre consumer spending have contributed to a lack of inflation in the Australian economy. This has been cited by the RBA governor, Philip Lowe, as the reason behind Australia’s period of record low interest rates since 2010.

The RBA cash rate is expected to remain on hold as a cocktail of both internal and external forces come to a head. Global monetary conditions are becoming more complicated and there is now a trade war wild card adding to the complexity. House prices in Sydney fell around 5% in the last financial year, the first annual decline since 2012. As house prices come under pressure and wage growth is persistently weak this exerts a negative pressure on consumer spending. According to the RBA, consumer spending accounts for around 60% of GDP in Australia so the negative effect further supports Governor Lowe's notion that "inflation might be just a bit lower than we would like for a while". 

Add to the above, tighter lending standards and the Royal Commission into misconduct in the financial services industry, and in as little as two months rate hike expectations have fallen dramatically. Money markets are now only pricing an eight basis points rise in May 2019, two months ago a 25bps rate hike was fully priced in. Some economists are now forecasting the next move up in the official cash rate could be as late as 2020. 

Source: Bloomberg

The real problem

But the real problem and cause for awareness comes as a widening differential between the official Reserve Bank cash rate and the cost of money for lenders emerges. Despite the official Reserve Bank cash rate remaining on hold at 1.5%, the bank bill swap rate has risen more than 40bps in recent months (equivalent to 1.6 25bps rate hikes). For the past ten years the gap between the official RBA cash rate and the BBSW has been close to 18bps, but it is now closer to 60bps. 
As funding pressures rise banks and smaller lenders may be forced to raise home loan rates. This could put pressure on the RBA stimulus as 80% of Australian households carry floating rate debt at record levels of 200% of disposable incomes. Any increase in home loan rates will put pressure on consumer spending and therefore inflation, thus challenging Australia’s growth outlook. 

Source: Bloomberg, ASX

Already, smaller lenders including the Bank of Queensland, AMP Bank and ME Bank, IMB, Greater Bank, Homestar Finance and AusWide, have responded to tightening money markets and increased funding costs by raising rates by up to 40 basis points to avoid eroding their profits. The big four banks are also under sustained financing pressure but are unlikely to raise lending rates out of cycle whilst the Royal Commission looms. 

If the BBSW rates continue to diverge from the official cash rate this highlights a problem as the RBA’s monetary policy lays its foundations on maintaining a low benchmark rate until consumer spending and inflation picks up. 

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

40 Bank Street, 26th floor
E14 5DA
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992