Australia’s fixed home loan rates have moved ahead of the Reserve Bank’s decision on Tuesday 29 September. By Canstar’s count eighteen lenders raised at least one fixed rate in September, while the ASX cash rate futures priced a 90 per cent chance of a rise to 4.60 per cent at the 24 September close. The Reserve Bank governor says the AI boom is adding to demand the economy cannot yet supply, and the ABS put August unemployment at 4.6 per cent.
What changed
Three pieces of news landed within a week. On 18 September the Reserve Bank governor gave her opening statement to the House of Representatives economics committee. She said business investment growth had picked up strongly, “driven mostly by spending on data centres and renewable energy projects”, and that “some of these upside risks to inflation appear to be materialising”. She named three sources of upward pressure on prices: the conflict in the Middle East, the AI boom and extreme weather.
Four days later, answering questions at a CEDA event on 22 September, she went further. “We are in a situation of excess demand,” she said, “and the AI boom is adding to that demand ahead of any potential supply impacts that it might have going forward.” In her account, the spending to build AI capacity shows up in the economy now, while any lift to what the economy can produce comes later.
On 24 September the ABS reported that the seasonally adjusted unemployment rate rose to 4.6 per cent in August, from 4.5. On the ABS series that is the highest reading since late 2021. The picture underneath is mixed. Employment still rose by 39,500 in the month, but full-time jobs fell by 6,300 while part-time jobs rose by 45,800, and the number of people unemployed rose by 28,200 to 722,900. Participation rose 0.2 points to 67.1 per cent, so more people were in work and more were looking for it at the same time.
Meanwhile lenders were already moving. Canstar’s rate tracking showed eighteen lenders had raised at least one fixed home loan rate in September by 24 September, up from sixteen, including all four majors, two days earlier.
Why it binds
The cash rate target is 4.35 per cent. The board raised it three times this year, in steps of 0.25, for 0.75 percentage points in total, then held in June and August. Fixed rates did not wait for the board’s next step because a fixed rate is set by a different clock.
A bank’s fixed rate follows market yields and the expectations reflected in cash rate futures. The Reserve Bank’s own research on the pandemic period, published in its Bulletin, describes new fixed rates rising “along with market yields” well before the cash rate moved. The market signal this month is on the ASX RBA Rate Tracker, which reads the 30 day interbank cash rate futures. At the 24 September close it showed a 90 per cent expectation of a rise to 4.60 per cent at the next board meeting. The same futures implied about 4.695 per cent for November and 4.745 per cent for December. Those are market prices, updated every business day, not forecasts.
The demand side is where the data centres come in. In its June quarter capital expenditure release the ABS said total private new capital expenditure fell 3.6 per cent, as spending on IT equipment dropped 53.0 per cent after a 199.6 per cent jump the quarter before. Buildings and structures investment rose 2.1 per cent, “driven by continued activity on data centre construction to expand capacity”, and the ABS said investment in data centre construction and expansion has risen for an eighth straight quarter. In the March quarter the ABS had put a record lift in IT investment down to server racks and processing equipment.
That is the tension the market is weighing. Unemployment has risen, which on its own would argue for patience, while the governor describes demand running ahead of supply and inflation remains above target. The ABS CPI rose 3.5 per cent in the 12 months to July, down from 3.8 per cent, with the trimmed mean at 3.6 per cent, against the Reserve Bank’s 2 to 3 per cent target band.
Who absorbs it
Fixed-rate loans are a small slice of new borrowing. The governor said at CEDA that fixed-rate lending reached up to 40 per cent of new lending during COVID and “now is down around 5 per cent”. The Bulletin records the same decline, to around 5 per cent of new lending by mid 2022. So the fixed-rate rises this month reach the borrowers taking out a new fixed loan or rolling onto a new fixed term. Most new loans are variable, and variable rates wait on the board.
For a sense of level, CBA’s own rate data showed its advertised two year fixed rate for new owner-occupier borrowers at 6.97 per cent on 25 September, or 6.82 per cent with its Wealth Package. Those are the bank’s published rates for new customers, not the rate any existing borrower pays.
Housing is part of the backdrop. The governor told the committee that “housing prices have fallen in most capital cities and new housing loans have declined”, while prices remain around 50 per cent higher than in early 2020. Business is feeling the squeeze too: NAB’s quarterly business survey, released on 24 September, put business conditions at minus 2 index points, its first negative reading since September 2020, even as confidence improved.
The governor’s list of price pressures reaches beyond AI. She also points to the Middle East and to extreme weather, which feed into energy, agricultural and technology prices. That keeps the AI boom as one driver of the inflation outlook, not the only one.
What to watch
The Monetary Policy Board announces its decision at 2:30 pm Sydney time on Tuesday 29 September, per its schedule. The decision rule is simple. A rise to 4.60 per cent would confirm what the futures and the fixed-rate changes had already priced. A hold would indicate the market had run ahead of the board, and fixed rates set on that expectation would have moved first.
The next data point arrives a day later. The ABS releases the August Consumer Price Index at 11:30 am on Wednesday 30 September, according to its release calendar. The governor has said inflation will not return to around the midpoint of the target band until late 2027, so the monthly figure will be read against that path.
After that, the ASX Rate Tracker is the gauge to follow for what the market expects from the following meeting on 2 and 3 November. If the December implied rate stays near 4.745 per cent after Tuesday, the market is still pricing more than one rise this year. If it falls back toward the cash rate, the market has moved closer to the board.
