Following on from the Reserve Bank’s recent decision to raise the cash rate 0.25% to 5.5% and signal that they don’t plan any more rises, what is likely to happen with bank mortgage rates over the remainder of 2023?
Unless the banks decide to try and poach market share from each other, the chances are high that rates won’t move all that much. Why? One key reason is that overseas experience is suggesting the decline in inflation from very high levels is not going quite as fast as had been thought a few months back.
There is a growing suspicion that while getting inflation down from 7% and higher towards 4% may be reasonably comfortably achievable, getting the final drop towards 2% could be problematic. There is certainly some assistance for countries coming from recent declines in commodity prices associated with China’s economy failing to spark as much as it seemed to be doing 3-4 months ago.
But there is unique tightness in labour markets in many countries and this risks delivering a pace of wages growth greater than would normally be the case. That is only as it should be when something is in short supply. But because wages can make up some 60% of total costs for many businesses, the absence of a quick retracement in wages growth towards, say, 3% will maintain pressure on businesses to keep raising their selling prices.
It is very unlikely that before the end of this year we will be able to express confidence that inflation is solidly on track back below 3%. That means the wholesale markets will tend not to rally all that much – unless that is the economy displays a lot of weakness.
That however seems unlikely considering the boom in tourism, rise in foreign student numbers, high job security, and record levels of net inward migration excluding the period in the early days of the Covid-19 pandemic.
Does this mean then that there is a risk monetary policy does in fact need to be tightened further?
The risk is certainly not zero, but having gone to such efforts in their recent policy review to express confidence that inflation is easing off, it would take an extraordinary degree of extra economic strength to make the Reserve Bank say they need to restart the tightening cycle.
If banks do compete for market share, are they likely to discount their lending rates by much?
This question will become very important as we approach Spring which is a time in the past when banks have tended to position themselves for the seasonal recovery in real estate sales and therefore mortgage business.
Earlier this year when banks heavily discounted their one and two year fixed rates the specials disappeared quite quickly. That is likely because the Reserve Bank called up bank chief executives to express their concern at how such low rates were undermining the effectiveness of their tightening monetary policy.
Memories of such ‘phone calls are likely to remain strong in bank senior minds for quite some time. That means the rest of this year is likely to see a continuation of competition focussing on better access to bank loans rather than the price of those loans. This is good news for borrowers because credit has been hard to get since the second half of 2021.
This good news is reinforced by the June 1 easing of Loan to Value Ratio rules, along with some necessary tweaking of the rules for implementing the Credit Contracts and Consumer Finance Act lending restrictions.
We can never rule out surprises
Especially as none of us has experience of what usually happens when a global pandemic ends. But for borrowers the interest rates environment looks like being relatively settled for the next few months before rate cuts kick off in earnest at some point in 2024.
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