Much analysis of the bond markets is produced from the perspective of the investor but ANZ Research has recently produced its regular report from a borrower’s perspective. The report covers the bank’s outlook for various types of interest rates, both domestic and offshore, and what it means for borrowers should those outlooks come to pass. The report can be summarised as follows:
Outlook for the Australian cash rate
ANZ thinks any tightening in financial conditions as a result of higher mortgage rates will be seen as a reason for the RBA to cut rates. ANZ Research already expects two rate cuts in 2016, one in the first quarter and one in the second quarter. The move by Westpac, Commonwealth and National Australia Bank is expected to increase the likelihood of a RBA rate cut.
Fixed or floating?
If rate cuts are delivered in February 2016 as ANZ economists are expecting, the bank expects floating rates to be reduced but it does not expect the banks to pass on the full amount of any such rate cut to borrowers. ANZ’s expectations for lower policy rates in Australia has the bank suggesting a larger exposure to floating rate markets for borrowers or hedgers. A larger exposure to floating rates would allow borrowers to incur lower interest charges as rates drop. However, ANZ notes the narrowing of fixed/floating rate spreads over the past few months, as market expectations have been raised that RBA would cut policy rates, so to some extent the advantage of lower rates has been partially priced in.