Hoping For RBA Independent Rate Cuts? Don’t Hold Your Breath.

The finance market in Australia is in a weird state at the moment. On the one hand we’re doing pretty good economically, with unemployment remaining low and our major trading partners still buying things from us despite our strong dollar. The finance market, specifically credit and lending, on the other hand looks much like it did back during the peak of the global financial crisis with lending rates at record lows. Now it’s not like this is completely unexpected considering that the Eurozone Crisis is still working itself out but favourable economic conditions and low lending rates rarely go hand in hand.

RBA Cash Rate 1993 to 2013

Indeed it’s gotten to the point where the Reserve Bank of Australia doesn’t believe they can effect much more change by lowering the official rate and will likely hold off on any changes until sometime next year. At the same time though banks funding conditions have continued to improve which has led to calls from industry bodies for them to start cutting their rates independent of the RBA. Banks have never been shy to raise rates outside of official RBA decisions but cutting them be something new for all of the major lenders, especially considering the rather turmutuous funding environment we’ve had to endure over the past 5 years.

Now no one would be expecting these cuts to happen now as there’s really no pressure on the market from either direction that would make such a move advantageous. Most industry analysts agree that within the next year however though conditions would be favourable for banks to do this. If this is the case then there’s a pretty simple method for checking to see if banks think that there’ll be a rate cut, whether by them/their competition or the RBA, within the next year. All we have to do is check the current fixed term rates and compare them with the current variable rates on offer and see what the difference is between the various fixed term lengths.

For this we’ll use fixed and variable rate home loans as they’re the best indicators of long term bank forecasting.

Right now the cheapest variable loan you can secure is about 4.99%, a bargain that we haven’t really seen since the deepest parts of the GFC. Whilst there’s quite a spread between the lowest and highest there’s a pretty good chunk of the market hovering around the 5.25% region so we’ll use that as our baseline for comparison. For a 1 and 2 year fixed loan it’s looking pretty similar with the rates basically remaining the same overall, although there seems to be more lenders willing to lock in at 4.99% for that amount time. It’s only at 3 years do we start to see much change when the average jumps up about 0.25% which is a pretty small increase and is essentially a hedged bet against any unforseen circumstances.

The take away from this is that by and large the banks don’t really expect the funding situation to change dramatically in the next couple years as their loan term loans aren’t really priced with that in mind. There are some examples of lenders offering very attractive rates around the 2 year mark (ones lower than their current variable rates) but they’re most certainly not the majority and consist primarily of smaller, non-bank lenders. Barring any drastic changes (like the Eurozone escalating again) I can’t see any indication that the banks are thinking of moving rates in any meaningful direction for the next couple years, nor do they expect the RBA to do similar.

This doesn’t really mean much unless you’re currently in the market for a new loan or refinancing but if you are then it means that the choice between variable or fixed is essentially moot at this point and you should go with whatever makes you feel the most comfortable. It’s actually a great time to get a home loan thanks to the wide spread stagnation of house prices and cheap funding which are set to continue for at least another year. Of course you probably shouldn’t dive in unless you’ve done the proper due dilligence but if you’ve been on the fence for a while I really can’t think of a better time to buy in the last 5 years.

Well apart from the darkest parts of the GFC, but that had a whole bunch of other issues associated with it.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.