Why home loan rates could fall fur­ther in 2020


THE slump in the Aus­tralian econ­omy has been se­ri­ous cause for con­cern for the Re­serve Bank af­ter its re­cent in­ter­est rate cuts failed to stim­u­late spend­ing.

Al­ready we’ve had three cash rate cuts in 2019, bring­ing the of­fi­cial rate down to 0.75 per cent – a level not seen be­fore.

But now all the chat­ter is around a con­fus­ing term for many: quan­ti­ta­tive eas­ing (QE).

Oth­er­wise known as print­ing money, QE aims to re­duce the cost of bor­row­ing for banks.

The econ­omy grows when the banks lend out money, but times have changed.

The wheels of the na­tion’s fi­nan­cial sys­tem have dras­ti­cally slowed and fi­nan­cial in­sti­tu­tions have tight­ened their lend­ing prac­tices. Con­se­quently, the econ­omy has shrunk.

Through QE, the RBA could create money by print­ing more cash and pur­chas­ing fi­nan­cial as­sets in­clud­ing gov­ern­ment bonds from pen­sion funds and in­surance com­pa­nies. This is done in the hope of in­creas­ing money sup­ply and help­ing to drive lend­ing and in­vest­ment.

In­vestSMART’s chief mar­ket strate­gist, Evan Lu­cas, said QE could re­sult in cheaper home loan rates.

“The RBA has tried to cut in­ter­est rates and bring the av­er­age cost of a mort­gage down by mak­ing it cheaper for banks to bor­row,” he said. Mr Lu­cas said, as a re­sult, it was cheaper for a home­owner to bor­row money.

“The catch now is this isn’t work­ing.,” he said. “They need to find an­other way to help the home­owner and con­sumer who has lever­age to have a more sus­tain­able, cheaper out­look on what they do.”

QE would bring down mort­gage rates fur­ther by re­duc­ing the cost of bor­row­ing for the banks, and Mr Lu­cas said it could re­sult in them “not hav­ing to cut the in­ter­est rate of term de­posit hold­ers”.

All ears will be lis­ten­ing to what Re­serve Bank gov­er­nor Philip Lowe says in his speech to­mor­row on un­con­ven­tional mon­e­tary pol­icy and lessons learned from over­seas.

AMP Cap­i­tal chief econ­o­mist Dr Shane Oliver said QE only took place once the econ­omy “hits rock bot­tom”.

“It has the abil­ity to push in­ter­est rates down in the econ­omy so that’s seen as a way of help­ing the econ­omy,” he said. “If you put more Aus­tralian dol­lars into the econ­omy it makes the Aus­tralian dol­lar less at­trac­tive com­pared to, say, US dol­lars or eu­ros, and pushes its value down.

“And it’s hoped some of that money in­vested in the econ­omy is lent out and spent.”

Dr Oliver said the goal of QE was to lower in­ter­est rates, re­duce the costs of funds, de­crease the Aus­tralian dol­lar, make the econ­omy more com­pet­i­tive and pro­vide higher wealth lev­els. He ex­pects rate cuts in De­cem­ber and Fe­bru­ary be­fore QE mea­sures be­gin.

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