Oz set for monetary tightening – though the RBA won't hike anytime soon

The real problem

But the real problem and cause for awareness comes as a widening differential between the official Reserve Bank cash rate and the cost of money for lenders emerges. Despite the official Reserve Bank cash rate remaining on hold at 1.5%, the bank bill swap rate has risen more than 40bps in recent months (equivalent to 1.6 25bps rate hikes). For the past ten years the gap between the official RBA cash rate and the BBSW has been close to 18bps, but it is now closer to 60bps. 
As funding pressures rise banks and smaller lenders may be forced to raise home loan rates. This could put pressure on the RBA stimulus as 80% of Australian households carry floating rate debt at record levels of 200% of disposable incomes. Any increase in home loan rates will put pressure on consumer spending and therefore inflation, thus challenging Australia’s growth outlook. 

Already, smaller lenders including the Bank of Queensland, AMP Bank and ME Bank, IMB, Greater Bank, Homestar Finance and AusWide, have responded to tightening money markets and increased funding costs by raising rates by up to 40 basis points to avoid eroding their profits. The big four banks are also under sustained financing pressure but are unlikely to raise lending rates out of cycle whilst the Royal Commission looms. 

If the BBSW rates continue to diverge from the official cash rate this highlights a problem as the RBA’s monetary policy lays its foundations on maintaining a low benchmark rate until consumer spending and inflation picks up.