Why the RBA’s Phil Lowe has split from his central banking peers

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OPINION: Australian borrowers are more sensitive to rate rises than their US counterparts, which is why the Reserve Bank can take a different path to other central banks.

Reserve Bank of Australia boss Phil Lowe has shown he’s not afraid to break away from the rest of the central banking pack.to Australian businesses and households by deciding to nudge higher the official cash rate by a quarter percentage point, instead of the half-percentage-point rise that most economists were tipping.

This puts the bank on a different path to the US Federal Reserve, which increased US official rates by 0.75 of a percentage point at its September meeting to a new target range of 3 per cent to 3.25 per cent, and signalled it would likely climb to a new range of 4.25 per cent to 4.5 per cent by year-end.In the first place, Australian borrowers tend to take out variable rate loans, which move in tandem with the official cash rate.

At present, mortgage repayments are only reflecting the 1.25 percentage point rise in interest rates between May and July – the 1.25 percentage point increase in the official cash rate since August 3 through October 4 has yet to flow through.In contrast, in the US, the dominant mortgage product is the 30-year fixed rate home loan, which means the Fed’s rate increases feed through to home loan repayments much more slowly.

Source: Financial Digest (financialdigest.net)

 

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