Steady drop in rates to continue

RESERVE Bank deputy governor Guy Debelle says the “steady decline” in average mortgage rates will “continue for a while yet” as borrowers pressure banks by shopping around for a better deal.

In a speech to the Australian Business Economists on Tuesday, Dr Debelle pointed to the RBA’s success since March in pushing down borrowing costs.

“The lower borrowing rates will encourage businesses and households to borrow, invest and spend when they are confident about their future prospects,” he said.

But while there was hope for a faster- paced economic recovery, assuming there was success with a coronavirus vaccine, Dr Debelle continued to be cautious.

“While the news about vaccines should help bolster that confidence, the recovery will be uneven,” he said. “It is likely to be some time before the vaccines will be widely available and distributed.”

His comments were delivered as the Australian stock market hit a nine- month high.

Dr Debelle said there had been a “marked decline” in fixed- rate mortgages since March when the RBA announced an emergency cut to the short- term cash rate and a massive bond- buying program aimed at lowering longer- term interest rates.

Big banks responded by cutting fixed mortgage rates to less than 2 per cent.

While the drop in standard variable home loan rates has been less, Dr Debelle said rates being offered to new borrowers were falling and existing borrowers were moving to refinance at a better rate.

“The average mortgage rates paid by households has continued to decline as households have continued to refinance,” he said.

“This is shown in the decline in new loan rates, which are still noticeably below the average rate paid. We expect the steady decline in the average mortgage interest rate paid by households to continue for a while yet.”

With wages growth historically low and expectations unemployment will continue to be elevated, Dr Debelle reiterated that the RBA did not expect to increase the cash rate for at least three years.

Australia has accumulated record debt to fend off the worst of the economic effect from COVID- 19, but Dr Debelle said the nation’s public debt load was “very manageable” and “absolutely sustainable” because of the low costs of borrowing.

He played down the chance the RBA would adopt a policy of negative rates, saying his colleagues at other central banks had observed households saving more, not less, under negative interest rates.