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.