New RBA boss, rates holding and bank leniency
Reserve Bank of Australia (RBA) Governor, Philip Lowe, left rates on hold as was widely expected last week. His “Some closing remarks” speech, delivered a few days later, has been well received by most people, and his shared insights after 43 years at the RBA, we’ve summarised for you. The new RBA Governor, Michelle Bullock, has a tough job ahead and the volatile landscape will be tricky to navigate. Adding to the volatility that the RBA is working with, is the price of oil dilemma we’re now facing again, pouring further fuel on the inflation challenge. Being at the peak of the fixed rate cliff with many borrowers now on higher interest rates, we are starting to see our savings diminish and spending slow. While rates are high, it’s encouraging though, to see the banks make it easier for home loan borrowers and small businesses looking to access finance which we also go into more detail in this month’s update.
“Some closing remarks”
Here’s a quick summarised version of the insightful final speech, from outgoing RBA Governor, Philip Lowe:
- He admitted to doing too much when it came to reducing interest rates to manage the pandemic.
- Australia’s inflation target of a 2-3 per cent range should stay, unless there’s good reason to change it which there is not, he said.
- Managing the economy with interest rates via monetary policy is a blunt tool at times on its own. It has limitations and its effects are felt unevenly across the community. Better outcomes would be achieved if monetary policy and fiscal policy were aligned, combining with politicians or an independent body to cut spending, raise taxes, and more. He was disappointed that the recent RBA review did not explore this in more depth.
- We need to work on productivity or risk our living standards stagnating. Positive it is to see stronger growth in wages of recent times but we need to be careful of these wages growing too fast given the inflation problems this causes.
- Interest rates directly influence how much people want to borrow and the value of assets but it’s not the reason why our house prices are so high in comparison to the world given interest rates have been at similar levels to those in other countries abroad. Rather it’s the outcome of the choices we have made as a society and where we live, plan, add infrastructure and tax, so we need to organise this better he said.
- The media too has a responsibility to ensure they are objectively portraying the RBA’s messages and not radicalising, selling articles, or providing clickbait for readers he reiterated.
For a full version of his speech, click here.
Cost of living – petrol pouring further fuel on the inflation challenge
This speech was well received with a long-standing ovation in Sydney. There were cheers and then even laughter, after Philip Lowe in closing, regifted the same coffee mug he was given by his former Governor Glenn Stevens, to Michelle Bullock.
For Michelle Bullock, the RBA now has Australian petrol prices to deal with which has quite a material impact on inflation. Fortunately though, for the RBA, the underlying pressures are signaling that the economy is slowing and the data is pointing somewhat in the required direction.
Higher repayments starting to really pinch
Consumer spending, in particular discretionary spending, fell for a third quarter in June 2023, showing that households through higher mortgage repayments are doing it tougher. When home loan interest rates increase from 2 per cent and skyrocket to 5 per cent, it’s understandable. According to the banks, more than 50 per cent of borrowers who were on these cheap fixed rates have rolled to higher rates as of September 2023.
The household savings ratio, has fallen dramatically. This data set is on the same negative trajectory and declined from 3.6 to 3.2 per cent, which is the seventh consecutive quarterly fall and the lowest since June 2008 – both graphs above and below, are from the Australian Bureau of Statistics (ABS). As we continue into the year, even if there are no further rate hikes, we will see those interest payments increase for more people and we are likely to see this data head in a somewhat similar direction.
Banks continue to do their bit
At least the lenders are doing their bit and are making it easier (some more than others) for those on uncompetitive terms to switch across to better deals, with some still offering cash back to cover switching costs.
If you’re an eligible self-employed small business owner, the banks are allowing you now to simply provide your payslips and bank statements, for the wage you’ve been paying yourself, to evidence serviceability requirements. This is opposed to full financials including tax returns and financial statements that are usually required to substantiate your ability to meet future repayments.
As we wrote in last month’s August update, the banks are also allowing favourable assessments to be completed with lower rates which makes it easier to service existing debts on the bank's calculators, and easier to move to a better deal. Instead of being assessed at 3 per cent above the borrower rate as per the Australian Prudential Regulator of Australia's (APRA) rule, those looking to refinance dollar for dollar can be assessed at 1 per cent above the borrower rate.
Final thoughts
Economic growth is slowing, that’s for certain. With households spending a lot more of their income on mortgage repayments, the data shows we’re now starting to feel the pinch. We can feel or hope, that rates shouldn’t go up further and should stay as they are as we move into 2024. It seems as though we’re on a month to month assessment and with how volatile the economy is, it’s really hard for any of our economists to be certain about what’s going to happen, let alone us mortgage brokers. There is a lot of data pointing towards a further slowdown in the economy which gives us hope that rates will remain as they are into next year. To Philip Lowe, after the stress that he's endured with that job, let’s hope he enjoys his retirement or will one of the big banks snap him up soon?
Enjoy your Sunday & the rest of your weekend.
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