There were no surprises today as the RBA voted to keep rates on hold at 0.1% at its October meeting.
The central bank also decided to maintain the target of 10 basis points for the April 2024 Australian Government Bond and continue purchasing government securities at $4 billion a week until at least February next year.
RBA governor Philip Lowe noted that the Delta outbreak of Coronavirus continued to disrupt the recovery of the Australian economy, but maintained it was still just a temporary setback.
“Many businesses are now planning for the easing of restrictions and confidence has held up reasonably well,” he said in a statement. “There is, however, uncertainty about the timing and pace of the bounceback and it is likely to be slower than earlier in the year…In our central scenario, the economy will be growing again in the December quarter.”
For AMP economist Shane Oliver, it was a case of another month having passed, rate movements no closer than before.
“The RBA’s stated conditions for a rate hike, i.e. actual inflation sustainably in the 2% to 3% target zone, are far from being met,” he said. “This will require sustained employment of around 4% and wage growth of 3% or more and that’s a fair way off.”
Rate expectations
But while the RBA reaffirms its promise not to raise interest rates until at least 2024, there is gathering talk among analysts that major banks will take their own action and raise variable rates out of cycle.
An October survey of 28 economists by comparison platform Finder found that 50% expected Big Four lenders would lift their standard rates within the next year.
Stability in the official cash rate did not mean lenders would follow suit, according to Finder head of consumer research Graham Cooke.
“Data from the RBA shows banks changed their rates seven times during the last stable period. Four of those changes were rate increases,” he said. “Those who aren’t on a fixed mortgage rate should stay alert to any changes from their banks as it could mean substantially higher monthly repayments.”
Pressure on home buyers
Any rate rises would have to be managed carefully, with borrowers stretching themselves to keep up with rising property values. In fact the research revealed first home buyers are borrowing over $53,000 more mortgage debt this year than they did last year, exposing them to more pressure should rates rise.
Because of this, 55% of the experts in the survey said they expected the Australian Prudential Regulation Authority (APRA) to intervene with lending restrictions in order to stem market growth.
“APRA recently confirmed they were looking closely at income to price ratios,” Cooke said. “This could be an early indication that lending restrictions are coming.”
APRA restrictions usually target investors to deter them from taking affordable stock off the hands of first home buyers, so watch this space to see how your portfolio might be affected.
Not so fast
Before we start to panic about lenders going rogue and hiking rates, current trends show they are still reducing their variable rates in order to compete for borrowers.
The latest RateCity research found 27 lenders cut at least one variable rate during September.
RateCity research director Sally Tindall suggested variable cuts were where lenders could compete in the short term, while adopting a “wait and see approach” on most fixed rates “as they work out what impact Australia’s Covid recovery plan will have on the economy”.
“However, this hasn’t stopped many lenders from taking the scissors to their more malleable variable rates, which were lagging well behind fixed rates,” she said. “When the RBA cut the cash rate last November there were just six variable rates under 2%. Today there are 48, including five investor rates. After the last two cash rate cuts, variable rates barely moved as most lenders opted to drop fixed rates instead. If anything, these cuts are overdue.”
Rush to refinance
It’s easy to see why banks are cutting variable rates at the moment, because borrowers are in a refinancing frenzy and there is plenty of new business to be acquired.
The last two months have seen record highs with refinanced loans valued at $17.8 billion in August.
With all the deals out there, it’s a great time to score a better rate or more flexible loan features. Reach out to Zinger Finance and our team of financial strategists can help you build a strategy, with the deals that suit you best.
