Australian mortgage rates are on the rise, with Westpac and some smaller banks moving and other big banks likely to follow. This was no real surprise, given the rise in money market borrowing rates this year, which has seen the gap between bank bill rates and the RBA’s cash rate blow out well beyond normal levels. While bank bill rates have fallen back a bit in the last month or so, the gap remains over 20 basis points higher than it has averaged over the last decade or so. Since banks get around 35% of their funding from this or related sources, it cuts into their margins, unless they pass it on in the form of higher lending rates.

Small banks had already moved and now it looks like the big banks are starting to follow – having delayed moving in the hope that the money market will settle down, which it hasn’t (and probably won’t, given slowing growth in bank deposits, meaning more competition for money market funds). While the rise in mortgage rates on average is small at around 15 basis points, it’s still another dampener on consumer spending and homebuyer demand, particularly given many borrowers will fear that more rate hikes will follow. It will hit the homebuyer market particularly in Sydney and Melbourne at a time when it’s already down. As such, it’s a de-facto monetary tightening and is yet another reason for the RBA to remain on hold for longer.

Source: Bloomberg, AMP Capital

The Reserve Bank is expected to yet again leave rates on hold when it meets tomorrow, which will bring it to a record 25 months in a row with no change. If growth and inflation picks up as the RBA expects, then a rate hike is likely at some point down the track but with downside risks around consumer spending, the housing cycle turning down in terms of construction and prices in Sydney and Melbourne and wages growth and inflation likely to remain lower for longer, we don’t see a rate hike until 2020 at the earliest and still can’t rule out the next move being a cut, particularly as falling home prices impact. A speech by RBA Governor Lowe (also tomorrow) is unlikely to signal any changes in the RBA’s views on monetary policy.

On the housing data front, expect CoreLogic to show another slight fall in home prices for August and housing finance data (Friday) to show continuing softness in lending to investors.

National capital city residential property prices are expected to slow further with Sydney and Melbourne property prices likely to fall another 10% or so, but Perth and Darwin property prices bottoming out, and Adelaide, Canberra and Brisbane seeing moderate gains.

What’s happening in the US?

While the past week saw pending home sales fall continuing the run of softer housing conditions, home prices continue to rise, consumer confidence is at a new 18-year high, personal spending is rising strongly with strong income growth keeping the savings rate high, jobless claims remain ultra-low and the goods trade deficit widened in July as imports picked up. Meanwhile core inflation rose back to the Fed’s 2% inflation target. All of which is consistent with ongoing but gradual Fed rate hikes.