Borrowing Costs To Remain At Historic Lows

By Pete Wargent on 21 Aug 2014
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The Reserve Bank of Australia (RBA) has released the minutes from its August 5 meeting.

Unsurprisingly, they revealed that interest rates should remain on hold for some time:

“The Board judged that monetary policy was appropriately configured and that, on present indications, the most prudent course was likely to be a period of stability in interest rates.”

The interesting point of note is that lenders are doing some of the heavy lifting on the Reserve Bank’s behalf. Last Wednesday the Commonwealth Bank, NAB and Westpac made history by cutting five-year fixed rates to unprecedented lows.

According to the RBA minutes:

“Average lending rates on housing and business loans in Australia continued to edge down over July, mainly owing to the ongoing replacement of more expensive fixed-rate and discount variable-rate loans from previous years. 

Overall, cumulative movements in interest rates since the start of the year amounted to a noticeable easing in financial conditions. Financial markets continued to expect the Bank to leave the cash rate target unchanged at the August meeting and over the year ahead.”

On hold forever.

The Commonwealth Bank has now also slashed its three-year fixed rate to just 4.94 per cent.

Banks had previously made noises about challenging funding costs, despite their record earnings and suspiciously healthy returns on equity.

Globally, wholesale funding remains cheap in historic terms, and Australia’s banks are now taking the opportunity to win market share by slashing fixed rate mortgages and offering discounted variable rate products.

“The RBA may not need to cut the official cash rate any further because the banks are doing the hard work for them.”

This is certainly taking the pressure off the RBA for now.

Even so, when the national accounts are released for the June quarter and a soft result is revealed, it would be no surprise to hear renewed calls for further assistance in the form of another rate cut.

Futures markets are taking the outcome as an each way bet, pricing in just under a 1 in 2 chance of another cut to the official cash rate in this cycle.

The impact of the easier lending rates is that the cash rate futures implied yield curve, while still inverted, has taken on a long, shallow appearance over the past month.

This signifies the likelihood of low interest rates for longer. 

In other words, the RBA may not need to cut the official cash rate any further because the banks are doing plenty of the hard work for them by delivering cuts of their own.

About the Author

Pete Wargent used a buy and hold approach to shares, index funds and investment properties to make his first million in his early 30s. He quit his full-time job at 33. He helps others do the same.

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