Gap between variable mortgage rates and RBA cash rate grows: Shane Oliver

Gap between variable mortgage rates and RBA cash rate grows: Shane Oliver
Gap between variable mortgage rates and RBA cash rate grows: Shane Oliver

The moves by the CBA, NAB and ANZ to hike their variable mortgage rates, following Westpac, add further pressure on the RBA to cut its official cash rate to offset the flow on to households with mortgages, according to Shane Oliver, the chief economist at AMP Capital.

"While the RBA looks like it doesn’t want to have to cut rates again, it won’t want to see households with a mortgage paying higher rates just now either, given the risk this will pose to consumer spending at a time when economic growth is still weak.

"So we remain of the view the RBA should, and ultimately will, cut rates again to ensure that this does not happen.

'We have pencilled in a 0.25% rate cut at the November meeting, but the RBA may need more convincing and so there is a risk it could be delayed into early next year. 

The AMP Capital chart shows the relationship between variable mortgage rates and the RBA’s official cash rate.

"Clearly the gap between the two has been expanding since the GFC supposedly due to “rising bank funding costs” as banks first had to rely more on bank deposits and now have to run higher capital ratios."

The widening gap applies for standard or discount variable rates.

"Because it’s borrowing rates that ultimately count for the economy rather than the cash rate, the RBA has had to compensate by cutting the cash rate more than would normally be the case in both the 2008-09 easing cycle and since 2011," Shane Oliver suggested.

"Although the chart doesn’t show it, we expect the RBA to do the same this time around as well."

Click to enlarge

Gap between variable mortgage rates and RBA cash rate grows: Shane Oliver

 

Source: RBA, AMP Capital. For illustration chart assumes cash rate stays at 2% in Nov.

Shane Oliver said the minutes from the RBA’s last meeting added nothing new and confirmed that the RBA was content with current interest rate settings.

"However, with the big banks hiking their variable mortgage rates, resulting in a de facto monetary tightening, the minutes are now a bit dated," he said.

Jonathan Chancellor

Jonathan Chancellor

Jonathan Chancellor is one of our authors. Jonathan has been writing about property since the early 1980s and is editor-at-large of Property Observer.

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Mortgage Rates

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