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Pressure mounts on RBA to cut rates

James Mitchell
— 1 minute read

Another blowout in bank funding costs is adding to the pressure for an RBA rate cut, according to a leading forecaster.

AMP Capital chief economist Shane Oliver is confident that the Reserve Bank will be forced to cut the cash rate by 50 basis points to 1 per cent this year. 

He explained that Australian economic data has been soft in recent weeks with weak housing credit, sharp falls in home prices in December, another plunge in residential building approvals pointing to falling dwelling investment, continuing weakness in car sales, a loss of momentum in job ads and vacancies and falls in business conditions for December.

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“Retail sales growth was good in November but is likely to slow as home prices continue to fall,” Mr Oliver said. 

“Income tax cuts will help support consumer spending, but won’t be enough so we remain of the view that the RBA will cut the cash rate to 1 per cent this year.”

Meanwhile, another spike in funding costs has seen a number of lenders hike their mortgage rates in the first few weeks of 2019. 

Bank of Queensland lifted rates by 18 basis points, while home loan providers Virgin Money and HomesStart Finance have also announced interest rate rises.

“The gap between the 3-month bank bill rate and the expected RBA cash rate has blown out again to around 0.57 per cent compared to a norm of around 0.23 per cent,” Mr Oliver said. 

“As a result, some banks have started raising their variable mortgage rates again. This is bad news for households seeing falling house prices. The best way to offset this is for the RBA to cut the cash rate as it drives around 65 per cent of bank funding.”

Digital Finance Analytics principal Martin North believes even small rate rises could see more households pushed into mortgage stress and increase the risk of default among those already under pressure to meet their monthly repayments. 

“The other point is that it will actually tip more borrowers into severe stress, that’s when you’ve got a serious monthly deficit. That’s the leading indicator for default 18 months down the track,” he said.

 

Pressure mounts on RBA to cut rates
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