How to get cheaper interest rates according to RBA Philip Lowe

If you want to cut through the noise of the daily news cycle and up and down of markets, who better to listen to than the governor of the Reserve Bank?

So it was that your humble columnist shuffled over to hear what RBA governor Phil Lowe had to say at the annual Anika Foundation lunch in Sydney. Turns out he had quite a lot of useful things to say.

The message for borrowers: get thee to your bank manager and ask for a better deal. For all the talk of tightening lending standards, if you are a good quality credit (and an owner-occupier), Lowe reckons you stand a solid chance of getting a cheaper rate.

Lowe expressed some frustration (in his easy-going way – he seems a very affable fellow) around the hand-wringing that has accompanied a number of smaller lenders pushing their benchmark variable rates rates higher for owner-occupier borrowers.

Residential buildings stand near the Sydney Harbor Bridge in Sydney, Australia, on Thursday, Aug. 11, 2016. Australia's ...
Residential buildings stand near the Sydney Harbor Bridge in Sydney, Australia, on Thursday, Aug. 11, 2016. Australia’s central bank said inflation would remain low and the economy could grow faster, while house-price concerns had cooled, in explaining its decision to cut interest rates for the second time in four months. Photographer: Brendon Thorne/Bloomberg

Brendon Thorne/Bloomberg

Analysts have fretted an unwelcome de facto tightening of financial conditions on households is on the cards, with the attendant negative impact on the economy. Lowe is “not concerned”.

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He says the data they get from Moody’s on securitised mortgage loans shows that the average borrower’s rate is actually 0.2-0.3 percentage points lower than it was last year.

Not only does the evidence not support the angsty narrative outlined above, it’s the very opposite. This may not be “consistent” with the general “vibe”, Lowe remarked, but the fact is “people are getting discounts”.

He even went further:

“I say this to everyone: if you are unhappy with the interest rate you are getting, go to your bank manager and ask for a lower one; because when I tell people this they actually come back and say ‘yeah, it actually worked’.”

While the RBA has never hiked when house prices are falling, that's not to say they couldn't.
While the RBA has never hiked when house prices are falling, that’s not to say they couldn’t.

David Rowe

“If you’re a good quality borrower you can get a good deal.”

So go see your bank manager, and tell them the governor sent you.

Correction we had to have

The message for property investors: this is the housing downturn we had to have. Prior to the recent declines, price growth had outpaced incomes for quite some years, accompanied by a steep increase in credit.

“I was quite worried about that,” Lowe said.

To address that over-extension of prices and borrowing, “I think we do need a period of moderate house prices or some declines,” he added. And if we are going to have falling house prices, better now when Aussie and global growth is robust and everyone has jobs, he said.

(Of course, we are talking the big east coast cities here – the regions tied to the boom and bust of the mining investment cycle, like Perth and Darwin, have taken their medicine well and truly already.)

This of course means any property investors hoping that the RBA might save their bacon with a rate cut shouldn’t hold their breath. 

Lowe also said house prices matter only as much as they potentially affect consumption, and therefore feed into forecasts for the things the RBA officially targets: inflation and unemployment.

The clear implication is that while the central bank has never hiked when house prices are falling, that’s not to say they couldn’t.

Not that a hike seems anywhere near likely in the near future. That’s the message for savers: the central bank is prepared to be patient, and is more than comfortable to stay that way. You are not about to enjoy any relief from paltry deposit rates.

The RBA doesn’t expect underlying inflation to get towards the middle of their 2-3 per cent target range until 2020. That’s despite expectations for above-trend GDP growth of a little over 3 per cent this year and the next, as the jobless rates slips to 5 per cent by the end of 2020.

Lowe did clarify that the bank won’t wait for inflation to hit the 2.5 per cent objective before raising rates.

So maybe – maybe – we get a hike in late-ish 2019. The market seems to reflect this. Bond traders are pricing in about a 70 per cent chance of a hike by this time next year.

Dependent on data, of course, we probably have at least a year before any real chance of a rate hike, so no imminent shocks to the status quo.

Lowe’s two global worries

Finally, when hypothesising on what might derail his essentially upbeat outlook, it was interesting and perhaps revealing that Lowe cited “some terrible global shock”.

And the Guv did have some thoughts to offer about the two big global worries: the risk of a financial system meltdown in China; and the threat that US president Donald Trump sparks a full-on trade war.

In terms of the latter, “we’re watching it like everybody else,” he said. Lowe was in Manila last weekend and it was apparently a topic of a lot of conversations among Asian central bankers.

But other than to say “people were quite worried about this”, Lowe had little to add. Nobody can predict how it will all play out.

One thing to watch: whether investment is declining because of rising uncertainty. Lowe says that is already the case in Canada and Mexico.

He even suggested there were “actually scenarios that are positive” and we end up with more free trade rather than less. This is “a fairly low possibility” he admitted, and “there are other scenarios where this escalates, and that would be very damaging to the global economy”.

Maybe that’s the final message. Lowe and his legion of economists are smart, but nobody knows what will happen tomorrow.

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