Official Cash Rate & Future Direction of Interest Rates – December 2016

The Reserve Bank decided to leave the Official Cash Rate unchanged at 1.50% on 6 December, 2016.


Why did some lenders increased variable interest rates the day before the Reserve Bank board meeting?

This is what the lenders have said.

There is a need to regularly review interest rates for investment loans to ensure they reflect economic and market conditions.

A plausible reason.

Lender have sought to acquire new customers by aggressive discounting but this, as always, proved too costly.

Another plausible reason.

APRA may have expressed their concerns in the growth of investment lending, and lenders had no choice but to increase interest rates.

An alarming reason.

Lenders’ wholesale funding costs have actually increased. As usual, lenders burdened their customers rather than their shareholders.

Would home loans interest rates follow soon?

This is highly unlikely because the lenders have to re-balance their loan books to reflect APRA’s guidelines. In addition, the politicians may not be as quite as they were with the investment loan interest rate increases.


Is the multi-decade bond bull market over?

In hindsight, it is very likely that the 3-decade long bull bond market ended on 2 August 2016. On this day, the 10 year Commonwealth government bond futures contract traded at 98.20 (equivalent to 1.78% yield) on the ASX 24 Futures platform (aka Sydney Futures Exchange).

The adjusted 3-month roll over contract high was 98.22 on the same date.

The contract closed today at 97.21 equivalent to a 1.01% increase in yield. This is a significant movement and cannot be ignored.


What is the Yield Curve implying?

The below graph plots the Implied Forward Interest Rate yield curve (blue line), and the Interest Rate Swap yield curve (red line).

Of note is the significant adjustment in the interest rate swap yield curve and implied forward interest rates are very noticeable when compared to the chart posted on 6 August 2016.


The yield curve is interpreted as follows –

(i) Short Term (less than 6 months) – seems likely interest rates will be steady.

(ii) Medium Term (12 months) – seems likely interest rates will be steady to higher.

(iii) Long Term (3 years) – seems likely interest rates will be higher.