2017 could be the year that the RBA starts raising rates

Mortgage lenders are anticipating higher interest rates down the track, and have started raising rates on fixed and variable mortgages.

It likely means an end to the era of ‘lower rates for longer’, could spell bad news for the stock market, and even worse news for highly-leveraged property investors.

According to the Australian Financial Review (AFR), ME Bank – which is owned by 29 industry super funds – is expected to announce that it is increasing its variable rates by up to 10 basis points. Fixed rates are rising by up to 15 basis points.

The AFR quotes ME Bank’s head of loans, Patrick Nolan as saying, “The increases were based on increasing swap rates – up 40 basis points since the end of August – and increasing cost of deposit funding.

The newspaper also reports that lender Bank of Sydney is raising its five-year fixed rates by up to 60 basis points (0.6%).

Justine Davies, a spokesperson for Canstar has also told the AFR, “This is the start of a growing trend for rates. We expect to see a large number of other lenders raise their rates in coming weeks.

Higher interest rates are usually bad news for stock markets because it makes non-share assets like term deposits and bonds look more attractive. That usually means a flow of money out of the stock market into those other asset classes.

However, given interest rates are already so low, small increases may not be the ‘bringers of doom’ many expect. Investors may gain some confidence from higher rates, particularly if it means inflation is rising. That usually means higher prices for goods and services and more revenue for companies.

It could also see Australia’s large cap stocks begin to generate stronger growth, particularly the big four Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC).

Banks suffer when interest rates are low as it crimps their margins. Higher interest rates could also see more cash flow into deposits – which are traditionally a low-cost source of funding for the banks.

One sector that will be hammered if rates rise is the property trust (A-REIT) sector, given its reliance on debt funding, along with the yield plays like Transurban Group (ASX: TCL) and Sydney Airport Holdings Ltd (ASX: SYD).


Attention investors: The Motley Fool's dividend expert Andrew Page has just released his #1 dividend stock for 2017. Chances are you've never heard of this little company, yet it's a fast-growing consumer favourite - with the shares up 155% in just the last five years! Even better, it's throwing off loads of cold, hard cash. As we speak, these shares are trading on 4.2% dividend yield, fully franked (6.0% gross). Making it a 'best bet' for growth AND income... No credit card required.

Simply click here to discover the name, code and a full investment analysis in our brand-new FREE report, "The Motley Fool's Top Dividend Stock for 2017."

Motley Fool writer/analyst Mike King owns shares in Sydney Airport. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.