Borrowers warned to brace for higher borrowing costs later this year
David Taylor
MARK COLVIN: Australians are being warned to brace for higher interest rates later this year.
Regardless of what the Reserve Bank does with official interest rates, analysts say rates on home mortgages could climb as much as half a percentage point.
Meanwhile global markets are bracing themselves for America's central bank, the US Federal Reserve, to make its next move due in the early hours of tomorrow morning.
David Taylor reports.
DAVID TAYLOR: Analysts say Australia's big four banks may have little choice but to significantly raise interest rates later this year.
And here's why.
Small business owners like Sydney-based Simon Palan are saving money waiting for the right time to invest in his business.
He says the decision to deposit his money outside of the big four banks was easy.
SIMON PALAN: I switched mainly because ING were offering better rates of interest, so I could park the money that I didn't need to get my hands on quickly - I could park that money there and earn a higher interest rate.
DAVID TAYLOR: Is the interest rate really that much different?
SIMON PALAN: It is higher and it's sufficiently higher.
DAVID TAYLOR: He says, at this point, there's little incentive for him to return his money to one of the four major banks.
SIMON PALAN: The banks would have to do a lot for me to transfer back to, you know, one of the big four.
DAVID TAYLOR: That includes raising their deposit rates. But that's precisely what one Brisbane-based investment expert predicts the big four will do.
Katrina King is the head of research at investment firm QIC.
KATRINA KING: There's certainly a risk to some more out-of-cycle hikes to come from the major domestic banks in Australia; maybe not just across mortgage products only, but across a range of their products.
DAVID TAYLOR: Ultimately, the banks may claw back the cost of higher wholesale funding and increased deposit rates by raising the costs of mortgages.
Australia's Reserve Bank, however, has the cash rate sitting at a record low of 2 per cent to ensure the commercial banks don't need to raise borrowing costs.
Katrina King predicts Australia's Reserve Bank may be forced to cut interest rates twice this year, just to keep mortgage where they are now.
KATRINA KING: So we think that there could be one if not two more cuts in the official rate in 2016.
DAVID TAYLOR: But it seems that isn't foolproof either.
Oliver Hartwich is the executive director of the New Zealand Initiative.
Last week the Reserve Bank of New Zealand dropped the official cash rate to a record low of 2.25 per cent. But the commercial banks simply haven't passed the full cut on to borrowers.
He says there's now talk in parliament about actually forcing the banks to tow the official line.
OLIVER HARTWICH: Of course, it's a political discussion in New Zealand as well. Our opposition party, the Labour party, has actually said publicly that they are considering even forcing banks to pass on future interest rate cuts. I mean that is a snap back to the 1970s to [inaudible] and, you know, regulating and controlling the economy. We hope it will not come to that.
DAVID TAYLOR: And if that doesn't work? Well you could always just drop money from the sky.
Oliver Hartwich says there are murmurs now in Europe that simply giving cash to consumers may be the only option left of central banks around the world to encourage consumers and businesses to spend.
OLIVER HARTWICH: And the idea was that helicopters - virtual helicopters - would circle around the country above heads and just drop money bombs basically to stimulate demand. Now of course we're not talking about real helicopters, it would just be electronic cash credited to our account.
DAVID TAYLOR: But all the same it would be nice to wake up with a couple hundred dollars in your bank account without doing anything.
OLIVER HARTWICH: It would be wonderful of course. The only problem is that once people realise that their money doesn't really represent any other value apart from the fiction of the ECB or any other central bank created, the value of money could drop quite substantially, which is of course the central bank wants to achieve.
They want to increase inflation, and that is exactly what helicopter money would do long term.
DAVID TAYLOR: Early tomorrow morning eastern time it's the US Federal Reserve's turn to make its decision on the direction of monetary policy.
Economists are tipping the bank will hold off raising interest rates again, worried the world's biggest economy can't cope with anything other than cheap money.
MARK COLVIN: David Taylor.
One analyst has told PM borrowers should expect higher borrowing costs this year as the four major banks compete for depositors and struggle under the weight of heavier wholesale funding costs. There's a suggestion the Reserve Bank may need to respond to this by cutting the official cash rate as many as two times by the end of the year. But will that work to easy the pressure on the banks, or even help the economy?