All the major banks have been forced to recoup some of the cost of raising additional capital by lifting mortgage rates over the last two weeks. If the Reserve Bank determines that this could harm the economy, then it will cut rates this week but this is by no means a certainty, although the markets have the probability of a cut on Melbourne Cup day at just over 50%.
On one hand, around 80% of existing home loan customers are ahead with their loan repayments, in effect watering down the negative impact of the recent rate increases on the broader economy. Also the RBA won’t be too disappointed with less irrational exuberance in Sydney and Melbourne home markets in recent times. So no rate hike is warranted.
However, on the other side of the equation, the economy is increasingly dependent on housing to maintain growth and there clearly hasn’t been a housing boom outside the key Sydney and Melbourne markets: and with a lower than expected CPI number last week, this allows the RBA to cut if they think warranted.
If you’re looking for a wager, at around a 50:50 bet on a rate cut this week, the odds are better than almost any horse in the Melbourne Cup, plus the announcement will be out around an hour before the race that stops the nation.
PS Congratulations on New Zealand’s clinical win over Australia in the Rugby World Cup final, now let’s turn to the cricket and hope that Australia recoups its pride with a win over New Zealand in the three test match series.