Australia: Significant increase in short-term wholesale interest rates - Westpac

According to analysts at Westpac, the significant increase in short-term wholesale interest rates and associated volatility has been a key topic of debate in markets throughout 2018.

Key Quotes

“Initially linked to higher borrowing costs in the US, a further spike in only Australian rates as the June quarter drew to a close saw participants' focus shift to domestic drivers of this pricing activity.”

“There are many market factors that have played a part in the surge in short-term interest rates.”

“While we believe that there is insufficient evidence to label the decline in deposit growth as the prime catalyst for higher short-term interest rates, deposit growth's persistent underperformance is critical to our view that the abnormally large market spreads present will, by and large, be sustained.”

“Put simply, if (in dollar terms) retail deposits increase at a lesser rate than credit, then Australian lenders’ reliance on wholesale funding must increase.”

“For superannuation deposits, weak income growth is not the only headwind. Over the past year, households' capacity to make voluntary contributions to super has been further reduced, limiting the flow of new fund inflows.”

“With the Australian economy expected to register growth at or below trend in 2018/ 2019 as global growth remains near its post-GFC peak, Australian investors' appetite for offshore assets is likely to persist.”

“The final point of note is the significant tightening of lending standards underway. This policy shift, yet again, is a negative for households' ability to accrue deposits.”

“Meanwhile, those who remain on interest–only terms will pay a higher interest rate now, and the majority will still inevitably have to move to principal & interest later to pay down the loan.”

“The longer that interest only terms are relied upon, the more rapid the required paydown becomes over the remainder of the 30-year term, unless a borrower is successful in refinancing the loan with another counterparty.”