MNI ANALYSIS: RBA Rate Signal At Odds With Mortgage Rate Fall

--Competitive Market Sees Banks Push Some Home Loan Rates Lower

By Sophia Rodrigues

     SYDNEY (MNI) - Interest rates on some Australian home loan products have

fallen by as much 50bps, a move that would come as a welcome relief for highly

indebted households and possibly improve the economy's consumption outlook, but

may be at odds with the Reserve Bank of Australia's monetary policy signal.

     Just last week, Governor Philip Lowe signalled greater confidence in his

outlook for the economy and thus interest rates. Lowe said the economy is moving

in the right direction with respect to growth, unemployment rate and inflation.

Given this and the fact that interest rates are "still quite low", Lowe said it

is likely that the next move in rates will be up, not down.

     In the last few days, home loan rates for some products have fallen by as

much as 50bps, making financial conditions more easy. Since lending rates are

both a function and determinant of RBA's monetary policy, a fall in mortgage

rate is contrary to the RBA's outlook because interest rates have fallen,

instead of being on a steady-to-rising path.

     --SOME 50BPS LOWER

     National Australia Bank, for example, lowered five-year fixed rate on

owner-occupier, principal and interest mortgage to 4.09% from 4.69%. For similar

loans for investor mortgages for a 3-year term, NAB cut the rate to 4.09% from

4.44%. NAB also reduced rates on fixed two and three-year interest-only

mortgages for both owners and investors by up 30bps

     Westpac came up with a special deal for first home buyers, while ANZ and

Commonwealth Bank also lowered interest rates on fixed interest-only mortgages

by up to 40bps.

     Even though significant proportion of the cuts are targeted at

interest-only and investor mortgages and represent whole or partial wind-backs

of the rate hikes effected last year, what is clear is that there is downward

pressure on mortgage rates.

     --COMPETITIVE MARKET

     The key reason is increased competition among banks to grow mortgage

business as housing market slows. Banks are also competing against non-bank

lenders who have been slowly increasing their market share because regulatory

pressures forced the banks to slow their mortgage lending business.

     As banks faced caps on their interest-only and investor mortgage lending

last year, they raised the price of such loans. In recent months, investor

mortgage lending has slowed considerably and the rate of growth of interest-only

lending has also slowed, leaving banks with more space to grow their business. 

     The increased competition has forced both banks and non-banks to reduce

lending rates on products, mostly fixed-rate ones.

     --CONSUMPTION, HOUSING BOOST

     While the lower rate will only affect a small proportion of mortgages, it

could have a wider impact if households switch between lenders in chase of lower

rates. Irrespective of the size of impact, there is no denying that lower rates

would come as a relief to highly indebtedness households, struggling with low

income growth.

     It would also improve households' ability to spend, thus boosting

consumption and improving the economy's growth outlook. The RBA has consistently

cited household consumption as a key risk to its forecasts so a pick-up would

reduce downside risk to its growth and inflation forecast.

     A fall in investor mortgage rates, including interest-only loans would also

help the housing construction sector, particularly the big stock of apartment

building, a concern for the central bank noted in the October Financial

Stability Review.

     --RBA REACTION

     Just as the RBA wasn't too pleased with some of the upward move in mortgage

rates last year, it is likely it may not take the latest fall too kindly because

of the potential risk to financial stability.

     The RBA has recently said that build-up of risk in household balance sheets

have been contained because of the regulator's supervisory measures but it also

noted that the level of household debt remains high.

     If lower rates lead to a surge in household debt again, it would worry the

RBA. For now, the RBA can just wait and watch the impact of easier financial

conditions which strictly speaking means easier monetary policy despite its

outlook for the next move to be up.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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