19 JUNE 2019 | Daily Top Story: Reserve Bank governor flags another rate cut as he hits out at the banks

The Reserve Bank governor has given a very strong indication that borrowers can expect at least one more interest rate cut this year, while attacking banks that have not passed on this month’s cut in full.

Key points:

  • Reserve Bank governor Philip Lowe says “it is not unreasonable” to expect interest rates to fall further
  • Dr Lowe says banks should fully pass through the reduction in the cash rate
  • The RBA is conscious of the negative affect on savers’ income, but says the overall benefit to households is greater from lower rates

Speaking at a business dinner in Sydney, Philip Lowe sought to answer a number of questions he thought people may have about Tuesday’s 25-basis-point cut, which took rates to a record low of 1.25 per cent.

“This brings me to the second question: are interest rates going to be reduced further?” he told the audience.

“The answer here is that the board has not yet made a decision, but it is not unreasonable to expect a lower cash rate.

“Our latest set of forecasts were prepared on the assumption that the cash rate would follow the path implied by market pricing, which was for the cash rate to be around 1 per cent by the end of the year.”

Dr Lowe noted that there are “a range of other possible scenarios” and whether there are further rate cuts this year will largely depend on whether the unemployment rate keeps rising, stabilises or starts falling again.

However, like Dr Lowe’s May speech, where he all but announced a rate cut in June, the governor’s statement is a very clear indication that rates will fall again this year unless the economy dramatically improves.

Lowe attacks banks that don’t pass on full rate cut

The governor was also unusually candid in his assessment of whether banks could afford to pass on the entire 25-basis-point cut.

“Yes, this reduction in the cash rate should be fully passed through to variable mortgage rates,” he said.

“This answer is based on recent reductions in bank funding costs.”

Dr Lowe pointed out that the gap between the cash rate and wholesale funding that banks raise on financial markets increased last year, but that banks recouped most of those costs by raising variable mortgage rates around 15 basis points.

However, those funding costs have now decreased, but bank mortgage rates remain elevated.

“Over recent months, these spreads have reversed all the increase that occurred last year and returned to their 2017 levels,” Dr Lowe said.

Of the big four banks, CBA and NAB passed on the rate cut in full to borrowers with standard variable loans, ANZ passed on just 18 basis points out of 25, while Westpac passed on 20 basis points to owner-occupiers but 35 basis points to interest-only property investors.

Bank acknowledges savers’ pain

There is not much news yet on how much a range of deposit rates will be lowered, but it is certain that savers will see a reduction in their interest rates from the RBA’s move.

Dr Lowe said the board was very cognisant of the negative effect its decision would have on savers and considered that in Tuesday’s meeting, but judged that a rate cut was better for the economy overall.

“In aggregate, the household sector pays around $2 in interest for every dollar it receives in interest income,” he said.

“So, in aggregate, lower interest rates reduce the net interest payments of the household sector and so boost overall disposable income.”

While seeking to boost household incomes and prop-up sagging consumer spending, Dr Lowe said the decision to cut interest rates was not in response to a deterioration in the bank’s economic outlook since its last Statement on Monetary Policy was published in May.

“The economic outlook remains reasonable, with the main downside risk being the international trade disputes, which have intensified recently,” he noted.

“The Australian economy is still expected to strengthen later this year, supported by the low level of interest rates, a pick-up in growth in household disposable income, ongoing investment in infrastructure and a brighter outlook for the resources sector.”

Household debt concerns have ‘receded’

Rather, Dr Lowe said the move to even lower interest rates was based on an accumulation of evidence that inflation was going to remain well below the bank’s 2-3 per cent target range, even if cheaper debt and lower interest payments resulted in stronger economic growth and lower unemployment and underemployment.

The RBA’s bigger fear is that people will get used to very low and falling inflation, which runs the risk of a cycle of falling prices and deteriorating economic activity.

“If inflation stays too low for too long, it is possible that inflation expectations move lower — that Australians come to expect sub-2 per cent inflation on an ongoing basis,” he said.

The Reserve Bank’s previous key fear about lowering interest rates — that it could spark another dangerous increase in already high household debt levels — has also diminished.

“Over the past few years, one concern has been that lower interest rates could add to the medium-term risks facing the Australian economy as a result of high household debt,” he said.

“We need to keep a close eye on this issue, but this concern has receded recently. Lending practices have been tightened considerably and many lenders have become quite risk averse.”

Source: https://www.abc.net.au/news/2019-06-04/reserve-bank-governor-flags-further-rate-cuts/11178898?section=business&fbclid=IwAR1-qvWUBXXXzcfc5FXcvGlU52GbskwRgWpDifoc8_So948NillJinf7e6Q


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