A reminder that there are forces other than the Reserve Bank working on Austalian interest rates came yesterday with a sharp rise in key money market interest rates.
Yields on 90 day bank bills, a key funding benchmark, hit 7.66%% yesterday, up 0.22% in the last five trading days, while for 180 day bills they jumped 0.29% to 7.83%, increasing the prospect of the banks being forced to make further nonrepair related increases in mortgage and other loan rates because of higher funding costs.
The rise in funding costs flowing from last year’s credit crunch forced the banks into an average 0.15% rise in mortgage rates in early January and both NAB and the Commonwealth raised their standard variable mortgage rates by more than 0.25% after the RBA raised the cash rate to 7% last week.
That enabled them and the other banks to make up much of the extra funding costs on their mortgages and to close the gap between the cash rate and the bill rates.
It’s interesting that the day after the rate rise, yields fell slightly across the board. Then last Thursday they started rising and then accelerated this week.
For whatever reason, short term interest rates have topped the levels hit during the credit freeze last August-September, indicating that lenders see greater danger in the markets at the moment.
It’s as though Australian banks and other lenders have suddenly become scared of lending to each other and have boosted the asking price (the yields) on the loans.
It’s not that there’s a shortage of liquidity. Goldman Sachs JBWere produced figures on Tuesday showing that the five major banks now have around $130.5 billion in liquidity in their accounts — that’s up $57.5 billion from normal levels of $73 billion.
The Reserve Bank said in its Monetary Policy Statement this week that banks had boosted their dependence on bills for finance from $5 billion a month to $20 billion, while the RBA had unwound $45 billion in currency swaps since late last year as the Future Fund drew down money into its accounts and the bank pumped more money into the cash markets to try and maintain liquidity and keep the daily cash rate steady.
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