All the headlines last week said the Reserve Bank board decided to leave interest rates unchanged – but that's not entirely true.
The board decided to leave the RBA cash rate steady, but it also decided to ease monetary policy a little more, for the interest rates people pay to fall.
The tricky thing about this rate cut from the RBA is that it’s mainly up to you to go and get it – our central bank isn’t serving it to you on a platter the way it does when the cash rate is trimmed.
Lower rates really are there for the taking if you want them. Westpac’s move to cut its two-year fixed home loan to 4.99 per cent is just the most obvious example.
What the vast majority of people – and apparently all the politicians – don’t understand is that in setting monetary policy, the RBA targets the rates people pay, not its own cash rate. Moving the cash rate up, down or not at all is just the means to the ends.
Last Tuesday, RBA governor Glenn Stevens explicitly spelt out the key factors in setting the monetary policy this month, but he left one implicit.
Stevens said inflation is not a problem for the next couple of years because of a softening labour market and unemployment edging up, that funding costs for our banks, big businesses and governments have fallen and are falling, that economic growth is going to be a little below average over the coming year and, therefore “an accommodative stance of monetary policy is appropriate”. He then said the cash rate would be left unchanged.
What he didn’t say but implied in everything else in the statement was that interest rates would come off a bit more. That’s what happens when banks’ funding costs fall.
Just as higher funding costs meant the banks did not pass on all the reduction in the RBA’s cash rate earlier in this cycle, lower funding costs mean they can cut rates without the RBA touching the cash rate. When the politicians and popular media were carrying on like chooks about banks not matching the cash rate movements, the RBA was always achieving the end interest rates it wanted, just as it is now.
Westpac being the first bank to break under the psychological 5 per cent home loan barrier for a fixed loan is only a symptom of what’s really happening.
The headline “official” bank variable mortgage rate has never been as meaningless as it is now – that’s not what any bank is actually charging anyone with a decent credit rating.
Walk into your current lending institution waving the offer by NAB’s online UBank brand to refinance your variable rate loan for 5.12 per cent and there’s a very good chance you’ll quickly be offered a discount on what you’re paying now – or go with UBank. (There’s one big catch though with the UBank offer – you have to be an employee, not self-employed, but you don’t have to tell your existing lender that.)
PS: There are even more mugs around than I thought – Westpac reports more demand than it dreamed of for its latest dud hybrid capital notes offer, as dissed here earlier in the week. The outlook for interest rates staying down just underlines that buying Westpac shares is a better bet than the hybrids.