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In light of new out-of-cycle interest rate hikes in response to the sustained rise in wholesale funding costs, AMP Capital senior economist Shane Oliver said that the “best way” to offset such cost would be for the Reserve Bank of Australia (RBA) to drop the official cash rate from its record-low of 1.5 per cent.
Last week, the Bank of Queensland (BOQ) and Virgin Money announced owner-occupier home loan rate increases of up to 18 basis points and 20 basis points, respectively, with both lenders attributing their decisions to sustained wholesale funding costs pressures.
The latest interest rate hikes have been introduced off the back of tighter credit conditions and continued housing market weakness.
The underlying weakness in the housing market has been highlighted by recent figures from the Australian Bureau of Statistics (ABS), which reported that housing approvals plunged 33 per cent in the year to 30 November 2018.
CoreLogic’s latest Hedonic Home Value Index also revealed that national dwelling values have slumped by 4.8 per cent nationwide, driven by a 6.1 per cent drop across Australia’s capital cities, led by an 8.9 per cent fall in Sydney and a 7 per cent decline in Melbourne.
Mr Oliver noted the weakness in the credit and housing markets and pointed to the “loss of momentum in job ads and vacancies and falls in business conditions”.
The AMP economist also said that he expects retail sales growth to slow in the coming months as home prices “continue to fall”.
Mr Oliver said that he expects the RBA to cut the official cash rate to reverse the downward trends.
“Income tax cuts will help support consumer spending but won’t be enough, so we remain of the view that the Reserve Bank of Australia will cut the cash rate to 1 per cent this year,” he said.
Mr Oliver also observed that the gap between the 90-day bank bill swap rate (BBSW) and the official cash rate has “blown out” to 0.57 per cent, “compared to a norm of around 0.23 per cent”, prompting lenders to raise their variable mortgage rates.
“This is bad news for households seeing falling house prices,” he said.
“The best way to offset this is for the central bank to cut the cash rate, as it drives around 65 per cent of bank funding.”
Mr Oliver echoed the sentiment of principal of Digital Finance Analytics (DFA) Martin North, who last week warned that mortgage rate increases could push more borrowers into mortgage stress, adding that the RBA may be forced to cut the official cash rate as early as March.
“Maybe we’ll see a rate change in March, and I think the next rate change from the Reserve Bank will be down, because at that stage, it’ll be pretty obvious that the positive spin for the economy is wearing extremely thin.”
Mr North concluded: “That, from a timing perspective, is interesting because it’s potentially just before the next election.”
[Related: ‘RBA spin wearing thin’ as mortgage stress mounts]
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