Rate rises not necessarily bad: Grattan

by Miklos Bolza14 Jul 2017
Even with mortgage stress and rising debt levels in the spotlight, potential cash rate rises by the Reserve Bank of Australia (RBA) may not result in catastrophe, according to analysts from the Grattan Institute.

Talking with Australian Broker, associate Trent Wiltshire said that while there were indeed some risks through elevated house prices and record high levels of household debt, there were other factors to consider.

“The risks of a rate rise are there but they’re probably not as much as they seem at first glance. Whatever happens to interest rates, higher rates may be a sign the economy is improving so it’s not necessarily a bad thing if they rise.”

An upward rate movement will not happen in the absence of outside factors, Wiltshire said. For instance, the RBA may increase the official cash rate in the event of rising wage growth.

“This might mean that the impact is not as large.”

While macro-prudential measures have pushed bank rates up out of sync with the cash rate, these risks have been minimised with the move only affecting interest-only loans for owner occupiers and investors. They have had no flow-on effects into the principal and interest space, he said.

The Reserve Bank would also consider effects that any potential cash rate rise would have on mortgages, Wiltshire noted.

“The RBA looks at what people are actually borrowing. When they’re considering the cash rate, it’s not so much what the cash rate is at. It’s what effect the cash rate has on mortgage rates.

“The RBA would be looking at what banks were doing. If they felt that the actual rates that people were borrowing at were too high, they might cut rates in response.”

Since the Reserve Bank was part of the joint regulatory team that brought in these macro-prudential measures on interest-only lending in the first place, the board would be happy that these speed limits are working, Wiltshire said.

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