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US rates increase, RBA on hold – but will Aussie banks increase anyway?

Last night, the US Federal Reserve raised interest rates for the second time in three months. A change that was supported by strong employment gains, steady economic growth, and confidence that inflation is rising to be in line with the central bank’s target.

Fed officials signaled two more rate hikes this year to be expected, and three hikes more in 2018 – so it is extremely clear that the plan to increase is firmly in place, but not fast enough to put the economy at risk.

Should we now expect Australian rates to increase soon? Unfortunately, our economy is painting a different picture.

The Australian jobless rate in February jumped to a 13 month high, reducing the RBA’s scope to increase rates. The unemployment rate rose to 5.9% from 5.7% in Jan.

Of course this is just one month of data, so hard to imagine that it will materially effect the course of Australian Monetary Policy, but it most definitely points to a softer labour market.

A weak jobs market also means that wage pressure may remain soft, and this doesn’t help inflation in getting back into the RBA’s target range of 2-3%.

On top of this, and because of Yellen’s comments that monetary policy would remain easy in US regardless of the current plans to increase rates over 2017 and 2018, the Aussie dollar was up 1.9% this morning to US77.05c.

Combining the jobs data with the current action in the AUD, the prospect of an RBA rate hike remains subdued.

Unfortunately, this doesn’t mean that we are safe from increases in mortgage rates…

We have already seen the Australian banks increase interest rates for owner occupiers, investors, and interest only loans completely independently of the RBA, so we shouldn’t feel safe that this won’t happen again.

Rising rates in the US has the ability to increase global funding costs for all banks, which ultimately the Australian banks will pass onto me and you.

What to do with your own mortgage?

As always, it is important to consider fixing in some of your loan depending on personal circumstances. External economic factors can have a bigger effect than you probably imagine.

Generally you will always pay a premium for a fixed portion of your loan, but don’t forget; certainty is expensive. Fixing in some of your loan and protecting your cash flow may cost you more money, but it also might save you if unexpected economic circumstance unfold. Think of it as insurance…

Book an appointment with your mortgage advisor to discuss a strategy that will work for you and your family.

Tom Hawley

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