ANZ: Mortgage rate hikes imminent

Mwahaha. Here’s a discussion that we are yet to have. There’s no doubt in my mind that the RBA and APRA will be ‘hands off’ the property market this year probably much of next. But, there is also the bond market to worry about. As ANZ says:

• Fixed-rate mortgage rate hikes will happen in H2, 2021 owing to an end to RBA supports such as the Term Funding Facility (TFF).
• As funding costs rise, so will rates, even more in 2022.
• ANZ sees macroprudential controls this year.

Meh. I addressed the last question yesterday. The economy will not be strong enough or financial risks high enough to tighten this year.

As for out-of-cycle mortgage rate hikes, that’s more possible. Aussie banks are exposed to the rising offshore interest rates that we are seeing offshore via their wholesale funding needs. The duration is typically five years on this debt so yields are still enjoying a little protection from global central banks sitting on the short end of the curve. But the move is definitely up.

One reason things may be delayed is that the amount of wholesale bank debt has been falling over the past year as deposits surged and even more was refinanced at the RBA TFF:

Good times for banks funding costs

This has consistently dropped aggregate funding costs:

That said, the market has now turned towards higher yields and if the RBA does remove the TFF after June then funding costs will begin to climb higher. Then again, it will know that it is implicitly egging on out-of-cycle hikes by doing so so perhaps it will extend the facility. Certainly, I do not expect the RBA to lift its yield curve control policy.

So, there are offsets and doubts about whether it will be an issue. But weighing against that, yields are definitely rising now and will likely keep doing so for a few months yet as we pass through ‘peak tantrum’ on US inflation.

I’ll take the under on the ANZ’s position. But it is probable that out-of-cycle hikes are coming in the next twelve months to fixed-rate mortgages and floating not long after that just not as far as ANZ says.

Certainly, before the RBA’s cash rate lifts in 2024.