Intrerest Rates

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GUEST OBSERVER
Undeterred by the pending election result and Britain’s shock exit from the EU, the RBA has announced that the cash rate will be kept on hold for another month:
<img src="/images/2016/07/05/thumbnail_56.jpg.png" alt="" width="466" height="236">
This is how many lenders have slashed three year fixed rates since May’s rate cut making a good case for home borrowers who want to lock in a competitive interest rate. The lowest three year fixed rate is now 3.67 percent from loans.com.au.
<img src="/images/2016/07/06/3.59.png" alt="">
This is the lowest variable rate on the market right now from online lender Reduce Home Loans. With experts predicting another rate cut in August, it may be possible that we’ll start to see the most competitive home loans in the 2% territory.
<img src="/images/2016/07/06/55.png" alt="">
Fifty-five lenders have made cuts to investor rates since the start of the year in a bid to scale up investor lending again.
<img src="/images/2016/07/06/0.93.png" alt="">
This is the percentage difference between the average Big 4 ongoing savings account rate and the best savings account rate on the market, despite 3 of the 4 majors actually increasing headline rates last month.  
<img src="/images/2016/07/06/12.99.png" alt="">
While most credit cardholders missed out on the May rate cut, four providers are now rewarding customers with cash back offers on purchases. The most competitive offer is from Bankwest that has a 12.99 percent purchase rate and 5 percent cashback on purchases (up to $300) for the first three months. 
Kirsty Lamont is marketing director of <a href="https://mozo.com.au/">Mozo</a>.
 
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Mozo's five need to know numbers after the July RBA decision

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GUEST OBSERVER
At its June meeting the Reserve Bank Board decided to keep the cash rate steady at 1.75 percent.
This decision was widely expected but it did surprise us that the Board decided to provide no guidance on future policy movements.
The final ‘guidance’ sentence was neutral: “Taking account of the available information, and having eased monetary policy at its May meeting, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time.”
Taken literally this statement does not preclude the possibility of further action in coming months, merely stating that it was not deemed necessary to take any action at the current meeting – a decision to move in June was never envisaged.
As we know from the minutes of the May meeting the Board deliberated about whether to move in May or whether to await further information and clearly with rates so low every adjustment must be considered very closely. As the forecasts in May stand the Board does not expect underlying inflation to return to the bottom of the band until 2017 and that will be supported by a second rate cut as indicated by market pricing in May.
Further information on whether that assessment in May is correct will be provided in the June quarter inflation report which prints on July 27 and will be available for the August Board meeting. It is our assessment that the information in that report will confirm to the Board that another cut is indeed necessary. However, it is clear from this statement that such an outcome is not considered automatic by the Board.
The commentary around inflation – “Inflation has been quite low. Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time.” – opens up a potential debate as to whether the Board may be becoming more flexible on the timing for which underlying inflation returns to within the target band.
At the moment that timing is clearly within the two year forecasting framework and we expect that that discipline will be retained in the near term. Consequently any assessment of the inflation outlook when the June report is received will need to include a forecast that inflation returns to the band over the two year horizon. Further out if global pressures make it clear that achieving that target would require too large a further fall in rates then more flexibility may be adopted.
Certainly that approach would be consistent with our view that the expected cut in August would represent the low point in the cycle.
Whereas in previous statements prospects for policy were mainly driven by the commentary around demand, prospects in today’s statement are all about the inflation outlook. On the demand front, the statement is as expected reasonably constructive: “… recent data suggest overall growth is continuing …” and “other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend.”
The most interesting commentary is around the housing market. Clearly the risk of pursuing an inflation target that is too high in the current disinflationary world is around over-stimulating asset markets and in the case of Australia, specifically housing.
The statement recognises that the recent rate cut may have rebooted housing but points out a number of reasons why this recovery is unlikely to be sustained, mainly around tighter lending guidelines, both voluntary and due to regulation, and expected increases in supply. This observation is important because it appears to allay any concerns that a further easing might over-stimulate the housing market.
Concerns around the Australian dollar remain. The surprise rate cut in May produced considerable dividends for the Bank in making a major contribution to the AUD falling from 0.77 to 0.72 US. That result would have been extremely welcome but it would also have been clear to the Bank that the adjustment in the currency was partly conditional on a follow up cut. The response to today’s statement has been for the AUD to lift further to above 0.74 and the statement does note an appreciating AUD will complicate the growth outlook and is therefore unwelcome.
The commentary around the world economy continues to be cautious with an uncertain outlook for China still the main focus.
Conclusion
In March 2015, following the decision, which came as some surprise, to cut rates in February 2015, the Bank chose to adopt a clear easing bias. That bias was acted on in May 2015. It was our expectation that a similar approach would be adopted at today’s meeting – that is, a surprise move would not have been considered without a likely plan to follow up with another. Unlike last March, no guidance was given today about that likelihood.
However, we cannot overlook the facts that under the current arrangements the Board will feel obliged to provide an inflation outlook which sees underlying inflation return to the target band within the forecasting period.
That period ends in June 2018 but will be extended to December 2018 at the August meeting. Based on the information available in May we do not expect that there will be a sufficient change in that information in the June quarter inflation report to justify a forecast return to the band even with a six month extension to the forecast period without a further rate cut. That task will be further complicated if the recent rebound in the AUD is sustained.
Consequently we recognise that a prudent central bank dealing with record low interest rates will seek to retain maximum flexibility as shown today but do not believe that today’s lack of guidance precludes a second rate cut in August. However, we do accept that the August cut is likely to represent the bottom of the interest rate cycle.
Bill Evans is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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