Yields taper off, but relief is fleeting for Australian mortgage holders
Can it really be called a ceasefire when US ally Israel continues to bombard Lebanon with rockets and Iran continues to hold the Strait of Hormuz to ransom?
Yes, according to the main parties involved.
Mere hours after threatening the death of an entire civilisation, US president Donald Trump has shown surprising willingness to join the table with his arch nemeses in Iran to sort out a peace deal.
Time will tell if Trump manages to frame this conflict into a win – Iran still has enriched uranium (despite being the very catalyst for the war in the first place), Iran has shown how capable it is in hobbling global energy supply, and the Islamic Republic is bruised but not beaten.
Pakistan-mediated negotiations are meant to take place this Friday, although Iran has threatened to withdraw if attacks on Lebanon continue.
If it is technically a ceasefire, it’s surely a brittle one, although that is apparently enough to temper the Australian rate outlook, if only slightly.
The three-year government bond fell to 4.56% yesterday evening, from above 4.7% earlier this week, bringing it back in line with mid-March levels. This suggests traders have lowered their bets on the Reserve Bank of Australia (RBA) committing to three more interest rate rises this year.
Similarly, Brent Crude futures fell below US$97 a barrel for the first time in nearly a month. This bodes well for mortgage pricing, as it will reduce Australia’s inflation forecasts, thus taking the wind out of the RBA hawks’ wings.
But in a 24-hour news cycle as unpredictable as the one playing out now, there’s little value in tracking volatile market pricing. With the ceasefire hanging by a thread, three-year bond rate crept higher throughout Thursday morning and is sitting at 4.62% at the time of writing.
The long-term effects will be more pronounced.
Iran is floating the idea of a permanent levy on ships passing through the Strait of Hormuz. This is supposedly illegal under international sea law, but, as history shows, international law is remarkably easy to break with few consequences.
If a permanent levy is put in place, it could have a permanent impact on energy prices. This would filter through to everything from building and transport costs to groceries.
Australia’s 1.2 million homes by 2029 target, which is already looking doubtful, could veer even further off track, leading to higher house prices and lower housing affordability.
In the meantime, households are feeling the short-term effects of higher mortgage repricing.
All major banks – Westpac, Commonwealth Bank, ANZ and NAB – were quick to pass through the RBA’s March rate hike. Since then, fixed mortgage rates have lifted across the board.
Westpac summed the mood up perfectly when it dropped a rate bombshell last week, warning that a deeper energy shock from the Middle East conflict will force the RBA into a more aggressive tightening cycle.
Westpac expects three 25-basis-point hikes in quick succession – in May, June and August – taking the cash rate peak to 4.85%. It had earlier pencilled in a lower peak and earlier cuts.
These projections remain in place, ceasefire or no ceasefire. If a peace plan emerges from talks on Friday, bond yields will likely fall, but it will come with little fanfare for struggling mortgage holders.
