Low Interest Rates and the Bank Response

October 23rd, 2019
Australia's interest rate is at an historic low, currently sitting at 0.75% and possibly heading even lower. As the Reserve Bank of Australia (RBA) moves the cash rate closer to zero, an increasing number of banks are failing to go along for the ride. Individual lenders have been told to look towards alternative lenders, with the RBA itself possibly resorting to even more desperate measures as it contemplates quantitative easing. With few moves left to stimulate Australia's struggling economy, the economic landscape is heading towards interesting territory.

The most recent interest rate change saw the official cash rate drop by 0.25% to a record low of 0.75%. Despite this historic drop, changes to mortgage rates were much less significant in the real world. While some small banks passed on the full 0.25% cut, others dropped mortgage rates and deposits by as little as 0.10%. The nation's big four banks have been under increasing pressure from Treasurer Josh Frydenberg, but there's very little he or anyone from the government can actually do to influence things on the ground.

According to a recent ABC report, the average interest rate would now be at 3.18% if the banks had passed on all three of the latest interest rate cuts in full. Instead, the variable rate offered by the big four banks ranges from a low of 4.77% at NAB to a high of 4.83% at Westpac. While both NAB and Westpac made the biggest cut recently, it was still just 0.15% of the full 0.75% reduction. ANZ and Commonwealth Bank made even less of a concession at 0.14% and 0.13% respectively. ;

The historic nature of the interest rate cut, and the bank's unwillingness to pass it on in full, both point towards a weak national economy. Australia's current inflation rate sits well below the target 2-4% range at just 1.5%, and we are comfortably in the top three globally for household debt. As things currently stand, the combination of rising house prices and lower interest rates may not be good news after all. This weakness may be overstated, however, with smaller banks such as Athena, Homestar, Auswide, and UBank the only ones to actually pass on the rate cut in full. ; ; ;

According to Michael Youren, Ibis World senior industry analyst, what the RBA is currently doing amounts to little more than buying debt to feed more money into the economy. When you throw in the possibility of negative cash rates in the months ahead, "Greater borrowing capacity would continue to inflate property values” and further expose Australia to a housing bubble. Negative rates are unlikely, however, with Philip Lowe from the RBA already hinting that he is more likely to use quantitative easing than let rates fall below zero.

Despite what we often hear in the media, low interest rates are certainly not good for everyone. People saving for a house deposit are already doing it very tough in Australia, with less interest earned and larger deposits likely to make the situation even harder. While access to credit has been improved for some borrowers, lower rates have also coincided with tougher regulations by the Australian Prudential Regulation Authority (ARPA). Regardless of what happens, the RBA seems to have lost some of its power as factors other than rates become more significant to the wider economy.