There were no Christmas surprises today as the RBA elected to leave the cash rate unchanged at 0.1% at its last meeting until February next year.
After RBA Governor Philip Lowe sought to hose down rate rise speculation following the November board meeting, a movement today was never going to be on the cards.
Bank movements fly in face of central policy
While the RBA has not moved the official cash rate for more than a year, individual lenders in Australia have been anything but static during 2021.
New research from RateCity shows that banks across the board have slashed variable rates and hiked fixed rates during the year as they set themselves up to deal with potential rate rises in the future and tighter lending restrictions from APRA.
Big cuts on variables
The Ratecity data shows 86% of the lenders on its database have cut variable rates during the year. That’s 107 loan products being discounted to attract borrowers. The big four banks cut their basic variable rates by an average of 0.43% since the end of 2020.
Since that time, the number of loans available with rates below 2% has grown from 15 to 65.
So what’s the catch? Well, odds are that you don’t fit the criteria for these loans. The reason being that they are the basic variables for most banks (or loans lacking in flexible features), aimed largely at first time borrowers and new customers.
RateCity research director Sally Tindall said the fact that banks had neglected to pass on rate reductions in 2020 meant they had room to move to lower them this year in a bid to attract new customers.
“Competition in the marketplace has brought these rates down to where they should be,” she said. “However, these ultra-low variable rate cuts are primarily for new customers. Existing variable customers who haven’t haggled with their bank recently are likely to be paying the same rate they were on in March last year.”
A number of economists predict the RBA to begin to increase the cash rate before the end of 2022 and then make further hikes during 2023. If this does happen, rest assured that lenders will be upping their variable rates too.
Of course, it is a big ‘IF’. There are a number of contrarian types out there that think rates may still go down before they go up and potentially even into negative territory.
If it ain’t broke, should you fix it?
Fixed rate products have been moving in the opposite direction recently, after starting the year also on a downward trajectory.
Reductions were par for the course in the first quarter of the calendar year, before fixed rate products below 2% peaked in April at 180. As that happened, 4 and 5-year fixed rates began to be increased by banks as talk gathered of rate rises in the near future.
Improving economic forecasts since July have seen further rate hikes across the board, leaving us with just 73 fixed rates under 2% as we end 2021. Those are predicted to wind down quickly in the new year.
“Fixed rates are likely to keep rising across 2022 as global economies continue to recover from the pandemic and central banks around the world start to lift official interest rates,” Sally Tindall said. “By this time next year, there could be no fixed rates under 2 per cent. In fact, the majority of fixed rates for owner-occupiers are likely to start with a ‘3’.
“Anyone currently on a fixed rate needs to prepare to pay significantly more when their term ends.”
Crypto arrives in big bank world
Another significant occurrence this year was an announcement by Commonwealth Bank that it would allow its customers to hold and trade Bitcoin and other cryptocurrencies via its banking app.
This was the first time the major lenders had actually acknowledged the future of cryptocurrencies by changing the way they operate to meet customer demand to make them more accessible.
And a recent survey of economists by Finder revealed that three quarters expect the other major banks to follow suit.
Finder’s head of consumer research Graham Cooke said Australia has the third-highest rate of cryptocurrency ownership, which shows that the trend is likely to increase going forward.