In his strongest signal of his still early leadership of the Reserve Bank of Australia, Governor Philip Lowe looks set to move interest rates to a new record low at the Bank’s June Board meeting. Stable at just 1.5% for a record 33 months, interest rates are all but certain to fall to 1.25% in June and are widely tipped to go to 1.0% by the end of 2019. Commentary has focussed on how lower rates will be good for the housing economy, but cannot mask the reality that economic conditions are tepid at best.
Wages growth is low, trade is constrained by a painful and ultimately value destroying dispute between the USA and China, business investment is sluggish, retail sales have been appalling and in general, the Australian economy has been skidding along, rather than moving on up. It is not alone of course: the decade long post-GFC malaise and the structural adjustment to global economies it rang in is still not properly understood and has impacted most economies and certainly all developed economies.
That has been the context for lower interest rates in Australia and elsewhere, and it continues to weigh upon the minds of central bankers, lenders and investors the world over.
We can see this reflected in the RBA’s graph of its Cash Rate. Australian interest rates have never been lower, nor have they been stable for so long.
There is now an extremely high likelihood that at its June meeting, the RBA will lower the Cash Rate to 1.25%. The RBA could have pulled the trigger earlier, but it doesn’t have that much room with which to play, so has been cautious for some time now. In typically dry language, Governor Lowe told the Australian Economics Society recently “…at our meeting in two weeks’ time, we will consider the case for lower interest rates.” Indeed.
One feature of lower interest rates is that housing loans will be cheaper, but more importantly, more accessible. Since December 2014, the RBA’s regulatory stable-mate, the Australian Prudential Regulatory Authority (APRA) has for some years instructed lenders under its supervision to ensure borrowers could cover interest rates at least 2.0% higher than the offered rate, and always above 7.0%. Most lenders exercised the conservative option and took that out to 7.25%, even as interest rates fell into the 4.5% per annum range.
The result has been that many otherwise qualified borrowers simply could not get a loan. Undoubtedly, this has been a drag on the housing economy, which at around 25% of the national economy, is a heavy-weight handbrake on consumption and growth.
Just hours before Governor Lowe’s comments on interest rates, APRA advised lenders that it was proposing to remove the specific reference to the 7.0% floor, but that it would increase the buffer to 2.5%.
Most new mortgage rate offers in 2019 are reported to be around the 4.0% to 4.5% mark. While we cannot be certain what actions the banks will take, interest rates they offer will fall on average when the RBA acts on the Cash Rate.
This is a concerted double-act by the regulators. Lower interest rates and more room for lenders to move is a potent improvement in capacities to lend and to borrow, because even taking the higher 2.5% buffer into account, more Australians will be eligible for loans.
Next on the agenda for policy makers is how to get wages moving.
