Mortgage shock coming despite RBA doves

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Coolabah Capital with the note:

Banks are gradually hiking borrowing costs for a range of reasons that are worth understanding. The first is that these interest rates were being artificially suppressed by the RBA’s suite of cheap money policies. Two particularly potent initiatives were the Term Funding Facility, under which the RBA lent banks $188 billion at an annual cost of 0.1-0.25 per cent, and the now controversial yield curve target, which involved the RBA buying 2-3 year bonds to keep their yield fixed at circa 0.1 per cent.

Both policies have now expired, which means the banks have to pay a lot more to borrow 2-3 year money to lend to households and businesses. This is why they are boosting their 2-3 year fixed interest rates. And they will probably continue doing so until most residential property borrowers are once again using variable- (rather than fixed-) rate products. In fact, we are already seeing banks slash variable rates down to 2 per cent while jacking-up fixed rates from sub-2 per cent to 2.5 per cent or more.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.