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US interest rates increasing & the effect on Australian interest rates

US interest Rates

Eleven years ago the Reserve Bank of Australia (RBA) cash rate sat at 6.5%. Interest rates were cut heavily through 2008 and early 2009, as Australia battled the Global Financial Crisis, before rising in a number of steps until November 2010. Since then it has all been down hill, with the cash rate falling to a record low of 1.5% in August 2016 and remaining there ever since.

On the other hand, the US Federal Bank earlier this week lifted its benchmark lending rate by 0.25% to a range of 1.5-1.75%. This means, for the first time in 17 years, US rates have now surpassed Australia’s.

Back then, the official interest rates of both nations exceeded 6%, and the Australian dollar slumped to just 48 US cents in early 2001, currently it sits at 76 US cents.

How will this affect Australian borrowers?

Historically speaking, whenever US interest rates have increased and surpassed Australian interest rates, the US market becomes more appealing to global investors and this results in the Australian dollar losing value relative to the US dollar.

Australian borrower

Analysts at investment bank Morgan Stanley warn that the big four Australian banks may start raising interest rates on all home loans, not just the investment loans that all banks have started lifting. They say the higher rates on investment loans will not be enough to protect the banks’ profit margins, so shareholders will win out over customers and home loan rates will increase regardless of what the RBA does with official cash rates.

Shore Financial can help you manage your exposure to interest rate movements. Contact us today to find out how.

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