Interest Rate Update (May 2022)

The following graph shows movements in both the 6 month and 3 year Bank Bill yield rates, for the period January 2018 to date.

These rates are wholesale rates which are net of any margin charged by financial institutions. It is not uncommon for retail premiums for 3 year fixed rates, to be 0.30% pa or 30 basis points above the wholesale premium.

Currently the 6 month wholesale Bill rate is 1.77% pa and the 3 year wholesale Bill rate is 3.36% pa, a premium of 1.59% pa or 159 basis points for the longer term.  The dramatic rise in rates since late 2021, resulted from improving economic conditions after COVID-19 restrictions began to ease, unemployment falling to historically low levels plus a sharp increase in inflation. The RBA interest rate rise of 25 basis points during May, merely reinforces that official interest rate increases made by the RBA, result from wholesale market increases rather than causing them, particularly for commercial lenders.

The rapid increase in rates can be seen in the graph, particularly in longer term rates, which have moved significantly ahead of short term rates. Therefore, fixing interest rates in the current market is generally unadvisable due to the large premium between longer term rates and current rates. In addition, history suggests that the longer term rates have a tendency to overshoot where current rates will end up, with data from 2006 to current showing that 3 year bill rates have had on average a 0.2%, or 20 basis point premium over 6 month bills.