This week, the US President is set to sign off on a $US1.9 trillion (2.5 trillion AUD) coronavirus relief package. If signed, the legislation will authorise the delivery of cheques worth $US1,400 to millions of low-and-middle-income Americans, as well as the unemployed. Unexpectedly, this policy will have profound impact upon the Australian borrowers.
With the stimulus package now on the horizon, the global forex market is beginning to price it in. The stimulus package is expected to significantly increase growth in the US economy, with some sources predicting 6-7% GDP increase in 2021 alone. There are two main consequences of a stronger US economy, firstly USD will rise causing AUD to fall in relation and accompanying economic growth is always inflation as households are now able to pay more for the same good. Consequently to combat the rising inflation and the inflow of foreign investment in response to a recovering US economy, US interest rates must rise accordingly.
These factors all impact upon the Australian housing market through both direct and indirect channels. The aforementioned comparative weakening of the AUD will also introduce inflationary pressure in the local economy through a different mechanism called cost push inflation, whereby the relative increase in price of import goods and production inputs are passed onto consumers through higher prices, thereby contributing further pressure on the RBA to increase the interest rate.
The global money market is a key channel for transmitting the impacts of the US stimulus package to the Australian economy. Money market participants examine two keys aspects when pricing assets and securities, especially bonds, the future value and the opportunity cost. The US stimulus package affects both of these, with the predicted higher growth driving up future value and makes lending in the US economy more profitable in comparison to the Australian economy.
The RBA is currently employing two forms of monetary policy control with the key one being yield curve control. RBA’s implementation of this policy specifically targets the three-year government borrowing by buying bonds in order keep borrowing costs within a target range. Whilst this strategy has been successful in suppressing rates towards the target, the longer term rates has been rising significantly. For example, in the past six weeks, the cost of the Federal Government borrowing money for a 10-year fixed term has effectively increased by 79 per cent, with interest rates rising from 0.94 per cent to 1.68 per cent.
However with the global market continuing to price in future growth, the cost for the RBA to maintain their targets and promises for the next three years will become more and more difficult, especially considering that the local big banks need to finance some of their loans by borrowing from overseas markets. With the interest rate on US bonds expected to rise significantly, this will pose a huge cost on local commercial banks which will likely be passed on to mortgage holders through increased fixed mortgage rates. Thereby demonstrating how in current times the rates in the Australian housing market isn’t solely controlled by the RBA.
In conclusion, borrowers may need to look towards alternate sources of funds for financing. Despite having comparatively smaller source of funds, private lenders such as KBRZ have more stable funding pools making them comparatively less susceptible to changing rates posed by shifts within the global money market. To find out more about refinancing check this previous blog, to find out how we can help you in a world of higher rates contact us through our website