Australia rate hikes may slow lending at major banks

Refinancing activity could rise as borrowers search for cheaper mortgages.

Australia’s three straight interest rate increases this year are expected to slow lending demand and weigh on major bank earnings, although low unemployment and strong borrower equity buffers should keep bad loans contained, analysts said.

“The rate hikes are likely to be a mild net negative for the major Australian banks’ earnings,” Lisa Barrett, a director at S&P Global Ratings Singapore Pte. Ltd., told Asian Banking & Finance.

The Reserve Bank of Australia (RBA) raised its cash rate to 4.35% after delivering three straight hikes this year, fully reversing the easing cycle in 2025 when rates fell to 3.6%. RBA Governor Michele Bullock said the central bank tightened policy to contain inflation linked to surging oil and commodity prices.

“While higher interest rates are generally positive for Australian bank net interest income, we believe these will be largely offset by competition, keeping net interest margins relatively flat,” Barrett said in an emailed reply to questions.

Nathan Zaia, a senior equity analyst at Morningstar Group (Australia) Pty. Ltd., said higher borrowing costs would reduce loan demand and borrower capacity.

“We haven't seen the impact in credit growth data yet, but with the rate hikes coming at the same time as the government is proposing changes to tax benefits for investors—we think the slowdown will be forthcoming,” Zaia said in an email.

He added that more customers are contacting banks for hardship support, although arrears remain stable.

Zaia said most borrowers still hold strong equity buffers, reducing the risk of significant credit losses for banks.

Erin Kitson, a director at S&P Global Ratings Singapore, said refinancing activity is likely to increase as borrowers search for lower mortgage rates.

“While unemployment remains low, we expect most borrowers to remain current on their mortgages and arrears to remain low,” Kitson said in an emailed reply to questions.

Banks with larger exposure to small and medium enterprise (SME) lending might face higher risks, analysts said. Outstanding SME loans reached $535b (A$747.6b) in February.

Zaia said some lenders, including Commonwealth Bank of Australia, could still benefit modestly because of their large base of low-interest transaction deposits.

Vincent Conti, senior lead economist at S&P Global Ratings, said the latest increase might be the peak of the tightening cycle.

“The combined impact of higher rates and squeezed household budgets should drive demand destruction in the near term, removing the need for further tightening,” he said in an emailed reply to questions.

“At this stage, inflation-driven upside risks to our cash rate view are balanced by the potential for earlier rate cuts as demand softens,” he added.