Is a drop in Interest Rates off the RBA radar?
Is now the time to fix in the mortgage?
With recent confirmation that inflation fell by 2.5 per cent over the 12 months to March 09, a slowdown in our economy and both the Prime Minister and Governor of the Reserve Bank finally using the "R word" this week, RP Data Senior Research Analyst Cameron Kusher looks at what impact these latest inflation figures mean.
Mr Kusher said that historically, what we have seen is that when inflation is high, so too are interest rates and in general when rates are low so too is inflation. He said that if cash rate movements are the RBA's prime weapon of influence over inflation, he questions why when all major economies where headed into recession last year did the RBA continue to raise interest rates at a time when most economies were slashing theirs.
To explain his stance on this, midway through 2009 Australia faced a situation where inflation was very high (4.9 per cent) and most economies around the world were heading for recession thanks to toxic debt and global equity market meltdowns. This 4.9 per cent CPI figure saw inflation well outside of the RBA's target rate (between 2 & 3 per cent) and as a result, the RBA lifted the cash rate.
GFC fallout
The fallout from the global financial crisis became apparent quickly. As a result, the economy slowed and the RBA begun cutting rates aggressively the ensuing months, fearing a recession was in the wings.
Interestingly, at a time when the RBA would traditionally be looking to lift rates, they cut them. Mr Kusher said that fortunately inflation has now fallen back within the preferred range at 2.5 per cent.
Pass it on!
Although the RBA aggressively cut rates over this time there are a number of instances where the banks have not passed on the full cuts. This became apparent following the latest RBA board meeting earlier this month where it was decided to cut the official cash rate by 0.25per cent.
Despite this drop, the greatest cut to interest rates passed on amongst the big four banks was just 0.10 per cent. Mr Kusher says this begs the question, "how much lower will rates go and what future cuts will home owners receive (if any)?"
Banks comparison on fixed rate motgages
Bank 1 yr (%pa) 2 yr (%pa) 3 yr (%pa) 4 yr (%pa) 5 yr (%pa) 6 yr (%pa)
ANZ 5.99% 5.99% 6.19% 6.59% 6.84% 7.24%
CBA 5.39% 5.79% 6.19% 6.59% 6.84% 7.24%
NAB 5.09% 5.29% 5.49% 6.09% 6.29% n/a
Westpac 5.39% 5.49% 5.79% 6.39% 6.39% 6.99%
Looking ahead
The Sydney Futures Exchange (SFE) yield curve for cash rate futures suggested this week that the cash rate would fall to a low of approximately 2.4 per cent during September and October this year.
This represents an expectation of a further 60 basis points cut from the current cash rate. Although cuts are anticipated the yield curve does suggests that the cycle of relaxing interest rates is coming near the end.
Fixed or variable?
Mr Kusher said, "Many mortgage holders are now considering if they should be moving from a variable interest rate home loan to a fixed rate home loan.
"In anticipation of the move away from variable to fixed loans a number of banks lifted their fixed rates earlier this week. In most instances either the National Australia Bank or St George has the cheapest fixed rate mortgage products.
"This result is surprising given that of the four big banks, the NAB was the only one which did not pass on any of the most recent interest rate cut," he said.
Historically variable home loans have dominated the market in fact, prior to 1995 fixed rate home loans consistently accounted for less than 5 per cent of the total home loan market. Between January 1992 and February 2009, 65 per cent of new loan commitments have been for variable loans with just 35 per cent for fixed rates.
Percentage of fixed rate home loans vs. variable (Feb-99 vs. Feb-09)
RP Data analysts anticipate that over the remainder of 2009, people will opt to secure their loans on fixed rates rather than variable loans.
Provided by: RP Data Property Pulse.
http://au.pfinance.yahoo.com/home-loans/features/time-to-fix-mortgage/index.html