Fears of ‘out-of-cycle’ bank rate moves quashed by top economist

Yet, economist Saul Eslake believes that we may not be seeing another out of rate cycle for at least another year.

“The most recent round of out of cycle rates increases was a response in part to increases in the cost of the money they raised from overseas, particularly in the United States, and there could be more pressure on that front over the year or so ahead,” Mr Eslake said to Smart Property Investment.

Mr Eslake explained that the recent out of cycle rate change was also responding to the divide between the bank bill swap rate and the cash rate, which he stated was then due to controversy based on allegations that the banks were acting inappropriately in bank bill swap markets.

“The banks had, for a while, thought that that increase in the spread between the rate that they actually pay for wholesale funding and the Reserve Bank's official cash rate would be temporary,” he said.

“Given that it’s turned out not to be temporary, they felt like they had to adjust their lending rates in order to recoup some of their increase in the cost of their domestic wholesale funding.

“Since that hasn’t increased any further, and there isn’t any reason to think that it will increase further in the months or year ahead, I don’t think there’s any reason to anticipate further increases out of cycle in bank’s lending rates.”

Mr Eslake added that because of recent scrutiny onto lending practices, especially following the royal commission, the banks will be hoping to improve their image in the eyes of their customers, so he sees their rates not moving any time soon.

“I don’t think we will see too much more of that [rate changes by the banks] until the Reserve Bank starts lifting its cash rates, which we agree is quite a long time away.”