We’re currently seeing interest rates around the world begin to slowly creep higher. Most noticeably of all, it is the US that is driving the recovery with numerous rate hikes scheduled for this year.

Last week I wrote about how housing plays an important role in the Australian economy and why the RBA are unable to cut rates. Even though the sluggish economy might warrant a lower official cash rate.

This week, we are facing another interesting point in the credit cycle as Australian banks are being pressured to raise rates, even though the RBA is not.

Second Tier Banks Raising Rates

In Australia we’re seeing some of the second tier lenders raise interest rates, particularly on their home loan products.

This is known as an out of cycle rate hike.

The reason being is that the cost of borrowing for the banks is also rising. Banks are able to access funds from the short-term money market in the same fashion that a lender might borrow funds from a bank.

As rates globally creep higher, that is putting pressure on short-term rates and making the cost of finding funds a lot higher.

Pressure on the Economy

Higher rates generally see money flowing into a country. As theoretically an investor is able to make more money by accessing higher interest rates. At the same time, higher rates stifle investment and borrowing, because borrowers need to pay back more interest.

This poses an interesting question though, as what kind of impact will this have on the AUD.

The RBA has left rates on hold for 20 consecutive months. And there is no indication that there will be a hike for the next 1-2 years.

With a rising USD, these out of cycle hikes, I believe will continue to keep credit conditions in Australia tight. Which will flow on into the economy as a whole.

That impacts things such as GDP and retails sales negatively.

However, if these smaller banks and ultimately the larger banks are forced to continue to jack up their interest rates, then the RBA will theoretically be forced to follow suit.

Which will be a bit of a double-edged sword.

This week we have the RBA coming out with their official interest rate decision. While we all expect no change, for the 21st time in a row. We will be watching closely to see if there is any mention of out-of-cycle rate hikes and what role that might play in pushing the official cash rate higher.

Key Takeaway: Interest rates in Australia might end up creeping higher, being pushed up by external factors. Even though the economy isn’t at a point to absorb them. That means the AUD/USD is getting pulled in different directions.