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Pressure Builds on RBA Rate Cut after Mortgage Rate Hikes and Dovish ECB

Pressure Builds on RBA Rate Cut after Mortgage Rate Hikes and Dovish ECB

Nathalie Huynh,

Talking Points:

  • Three out of four largest banks hiked variable mortgage rate: Westpac, CBA, NAB
  • These signaled a tightening of financial conditions, contributing to expectation for dovish RBA
  • Equities and risk assets rallied on this, in addition to ECB spillover effects

Australian dollar stayed weak and risk assets rallied in the morning. Apart from the spillover effects from a dovish ECB that led to expectations for easing by other central banks, local news today focused on another mortgage rate hike by National Australia Bank.

Variable mortgage rate by NAB rose 0.17%, after a 0.15% hike by Commonwealth Bank of Australia yesterday, and 0.2% hike by Westpac Bank last week. The banks cited rising costs of lending due to new capital regulations. The big four banks of Australia hold around 80 percent of the home loan markets.

With a swelling property market similar to its neighbor New Zealand, mortgage payment is one of the popular expenses of local households and that filters to considerations affecting monetary policy by the Reserve Bank of Australia, i.e. its rate decision.

The almost unanimous rate hike by the big three banks is perceived as a signal of tightening financial conditions, or a shortage of funds to lend. This added to ECB’s dovish tone overnight to fuel speculations that the Reserve Bank will need to compensate with a rate cut soon. RBA will meet on November 3 and December 1.

The graph below displays projection of future interest rate in the country, with each line representing expectation on a particular day. Projected interest rate has lowered after each of the rate hike: today, 2 days ago, and October 14.

Pressure Builds on RBA Rate Cut after Mortgage Rate Hikes and Dovish ECB

AUD OIS today, 2 days ago and 1 week ago. Source: Bloomberg

Australian dollar tumbled 0.7 percent yesterday after CBA announced a rate hike, although the effect of NAB’s hike today drowned down amid spillover effect of European Central Bank’s meeting overnight.

In contrast to AUD’s weakness, equities and risk assets rose in Australia in anticipation of further RBA easing. The ASX tested 61.8% Fibonacci at 5361, as shown in ASX 200 chart below.

Pressure Builds on RBA Rate Cut after Mortgage Rate Hikes and Dovish ECB

Daily Chart - Created Using FXCM Marketscope

Market now speculates that Australia and New Zealand Banking Corporation will also hike mortgage rate soon.

--- Written by Nathalie Huynh, Currency Strategist for DailyFX.com

Contact and follow Nathalie on Twitter: @nathuynh

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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