The RBA statistical release shows the relative policy rates in US, UK, Canada, Japan, ECB and Australia. Looking at the rates from 1999, we see that since the GFC rates have been lower, thanks to unconventional monetary policy. In contrast to other countries, the Australian cash rate has remained higher, for longer, but is at a record low. Will it fall further?
Yahoo7News reports that according to 1300HomeLoan managing director John Kolenda, who last year accurately warned banks would lift their mortgage rates out-of-sync with the Reserve Bank, said the current official rate of 1.75 per cent would be the “new norm”.
The Reserve sliced rates to 1.75 per cent – the lowest level on record – last month over fears about the level of inflation. Prices have been dropping for several months across the country with deflation a real threat in Perth.
Mr Kolenda said consumers were now more sensitive to the impact of higher interest rates which meant taking them back to what was once considered normal was unlikely.
“We are unlikely to see official interest rates move to pre-global financial crisis (GFC) levels and the standard norm of the future will be lower than historical levels for the next decade,” he said.
“The monetary policy game has changed and the RBA has found cutting its cash rate is not necessarily an instant remedy for economic stimulus.
“Conversely, any time the RBA increases official rates in the future could have a disastrous impact on consumer confidence and the economy. Consumers are now very rate sensitive and when they rise they are likely to stop spending and revert to saving.”
Markets are pricing in another interest rate cut by the end of the year although economists believe the Reserve’s next move will be a rate increase.
Mr Kolenda said there was a real prospect the Reserve would cut rates again.
This despite stronger than expected GDP growth, reported recently. Inflation is below the RBA’s lower bounds.
Currently, lenders are heavily discounting their mortgage rates for new loans and refinanced transactions. Property transaction momentum appears to be increasing after a slow few months, and house prices are rising in most states.
So, on one hand, there are good reasons to expect the RBA to cut further, and keep rates low for a long time. On the other, the property market is alive and well, and will be a handbrake on further cuts.
We expect out of cycle rate hikes for many mortgage holders, once the election is passed as lenders attempt to repair their margins, and we are less convinced the RBA will cut again anytime soon, give the current property trends – in fact, we need more macroprudential controls, not lower interest rates. That said, the medium term outlook is for rates to stay low for a long time, and this does mean large mortgages will continue to be serviced as current levels. But any hike in rates would have significant negative impact on households and the economy, given the sky-high debt levels in place at the moment.
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