Are rates going to be reduced? Now RC is finished will APRA start to relax

Something I was thinking looking at previous cycles.

The (sharp) downturn usually doesn't last long in Sydney or Melbourne.

Usually 1/2 years Im talking about the sharp falls as we have seen over 12 months.

Now that is the case we are about 1 year in.

WIll RBA start worrying ?

Will APRA start relaxing rules sooner than some here expect?



We are starting to see the RBA change their tune.

Reserve Bank of Australia could cut cash rate over weakening economy

 

I listened to Phil today at the press club address and he sounded pretty middle of the road to me. Happy that housing falls are contained to Sydney and Melbourne, happy with our economy and our employment figures. Happy he has the option to cut rates if something global happens. Ready to raise them if we have more growth and inflation. He wasn't as convinced as the headline of this article. Rate cuts as likely as rises as Reserve Bank governor eyes falling house prices

 

And if dropping interest rates does not work, we risk ending up like Japan , with a bad dose of stagflation.
Encouraging people to take on more and more debt without good growth in wages isn't going to get interest rates moving upwards and its certainly not going to get consumers out spending money, unless you deal with issues of why they are not spending money, especially in retail.

 

It's very possible we have a couple of major important differences.

1. WE have a higher berth rate Japan 1.44 Australia 1.81
2. We have migration. That is Japan really does not have inbound migration. 1.6% Autralia .5 Japan
3. We haven't and unlikely to have a lost decade but who knows?

So we like to procreate and like migrants. In so if no other points I think we will be different to Japan.

 

They'll keep it to bolster their profits, of course. RC is over, recommendations are out, Govt will faff about for 6 months regardless of who gets in. We'll all forget about most of it.

 

With Libor rates high, FXswap rate rising, external funding costly and rising...I would say a 50 basis cut by RBA resulting in 25 basis passed on has better odds.

but this is election time, I won't be surprised if they slowly creep the rate a little before the cuts and then pass on the full cut to avoid election time 'saviour of the mass' drama.

even if they do cut it, does it put a floor to falling prices?

 

Maybe 10-15 points passed on.

If APRA brings serviceability rate to 6.5% that will make more of a difference.

 

I think comparing ourselves to Japan is a bit overstretched.

The US had zero rates but look at them now.

We need a Trump!!! Make Australia Great Again!

 

Your right it is a bit hard to compare Australia to Japan.
Where Japan had mountains of public debt it is backed up by big mountains of household savings.
One could just borrow to the other .
The issue for Australian banks is a good portion of our debt is funded from overseas , and usually in USD.
Then also look at what happened to US house prices after the GFC, many areas became a lot cheaper, and a lot more affordable. The debt levels of the people that bought property in the years after the GFC were a lot lower.
To expect Australia to follow the lead of the US , whilst they are raising their rates, and were still mired in debt is a bit of a long shot.
If wage growth stays low will the Australian banks keep on writing out bigger and bigger loans , and many also forget that wage growth has been very low since 2012 ,yet 2 of our biggest markets have seen massive increases in prices.

 

Banks will probably increase rates another 10 - 15 basis points in the next few months, ahead of any cut to the cash rate, under the auspices of pent up margin compression from heightened overseas funding costs. Then when the RBA actually moves on a rate cut later in the year, banks pass on maybe 15 - 20 points and voila they've pocketed nearly the whole 25 points.

 

Or, in this world of declining equity and increasing mortgage prisoners, we might actually see the first outright and conspicuous decoupling of variable mortgage rate movements from RBA cash rate movements. Banks might decide that enough of their back book is trapped, unable to refinance due to minimal equity and tighter lending standards, that it's worth just hiking rates on existing products while offering competitively priced new products for lower LVR customers.

 

That horse bolted the best part of a decade ago. The banks have lifted rates outside of RBA cycles many times in the last decade - most recently you've seen this happen with multiple lenders across the last 2-3 weeks by between 10-18 bpts. They also failed to pass on cuts in full, many times. They have added well over 100 bpts to their pre GFC margins . ANZ has had a decoupled policy where they announce their rates every 2nd Friday, for almost a decade as well. NAB ran "break up" ads on Valentines Day about 7 or 8 years back to announce that they were doing their own thing as well.... There is absolutely zero correlation between cash rate and rate to borrower any more, sadly. And if brokers go, so goes distribution for 35-40 non major lenders .... the Big 4 banks will be free to do as they please.... unless multiple new loans.com.au type of models evolve. But many have tried this, and failed. Its easier said than done. Firstmac has done it with loans.com.au because Kim Cannon thinks 10 years ahead of everyone else and importantly because he owns his own product. Some may remember that ANZ failed miserably with One Direct? And UBank while profitable, offers neolithic products and internet banking and is only a NAB product. They are not competition. They are just more NAB market share. So those who assume that online will bring competition may be underestimating just how difficult online is.... Don't confuse lendi or clickloans for online lenders. They are telephone based mortgage brokers . They dont manufacture their own product- they sell banks products just like every other broker .

Mortgage Managers may may a comeback online though..... if they have deep enough pockets to set up the IT infrastructure /backend .... which I doubt - but we shall see.

 

Last Syd boom/bust cycle lasted 7 years

 

I am not sure what people are expecting to happen if the RBA was to drop rates again.
Its only a sign of desperation and I would be surprised if it had any success in improving things.
The AUD would probably take a hit and maybe even push up the cost of overseas funding .
The market really needs wage growth to see some sustained growth(which may push up interest rates) or years of stagnant house prices.
The RBA, the government and the regulatory bodies have made a complete balls up of it all since 2012 when interest rates started dropping from 4.75% to the current level of 1.5%.
Thats almost a drop of 3.25% and yet the economy is seriously misfiring in many areas,as far as households are concerned...
For anyone that took out a mortgage from 2007/2008 , they have watched the RBA drop rates from a high of 7% to the current low of 1.5%, that used to bring a big smile to my face as more and more money was diverted from interest payments to paying of the principle of the loan, and the constant stream of letters from the bank that rates were going down again and again , and again.
Thats a huge difference in interest payments and a lot of money that should be going into other spending, its no point sugar coating over issues about household debt, without dealing with the real issues.

 

Totally agree.

RBA drops rates: banks say "sorry, can't pass it on in full, we've got overseas funding that doesn't benefit from the rate cut"

RBA raises rates: banks say "sure thing, we'll raise 25 basis points and then some"
what happened to banks overseas funding that doesn't suffer from the rate rise?

 

yawn

 

The RBA certainly threw out the baby with the bathwater when it revised down its economic forecasts last week , even surprising the markets with its bigger than expected downgrades due to very sluggish consumer spending.


No Cookies | The Mercury

"The RBA elaborated upon its new neutral stance in Friday's Statement on Monetary Policy, saying it now expects economic growth of 2.5 per cent in the 12 months to June this year - down from its previous forecast of 3.25 per cent."
Now thats a pretty big change .

"It similarly slashed its inflation forecast for the same period from 2.0 to 1.25 per cent."
For the last year or so there were optimistic that the really low inflation numbers were actually going to go up.

"Its annual GDP and inflation forecasts for the year to June 2020 were cut from 3.25 and 2.25 per cent to 2.75 and 2.0 per cent respectively."

And it also expects wage growth to stay sluggish for at least a couple of years.
So much for the wage growth that many in government had been hoping for, although I wonder if it was all for show in a attempt to get re-elected.

"The RBA does not share Treasury’s optimism that wage growth will lift from its current level of just 2.3 per cent to 3.5 per cent by 2020-21. The RBA expects wage increases of just 2.6 per cent by then, which would imply much lower personal income tax collections than Treasury expects."
Nocookies

Not sure how the banks are going to write out bigger and bigger loans if we end up with a "lost decade of wage growth"