Governor of the Reserve Bank of Australia, Glenn Stevens, has said in a speech today that if cash rates were to move, the next move would almost certainly be a cut. The speech, to the 2015 Economic and Social Outlook Conference in Melbourne, Australia said with regard to monetary policy, “It seems likely that an accommodative stance will be appropriate for some time yet. Were a change to monetary policy to be required in the near term, it would almost certainly be an easing, not a tightening. The rate of CPI inflation is clearly no impediment to easing. The housing market may be calming, lessening risks from that source, though by how much and how persistently we cannot yet know.”
Mr Stevens addressed the speculation surrounding the decision of the big four banks to increase mortgage rates and how the RBA may cut rates to offset this effective tightening of monetary policy. He said this had been done previously. “One such occasion was in May 2012, when the Reserve Bank Board wished to ensure the economy received a worthwhile stimulus from a policy easing after a period in which lending rates had tended to increase even while the cash rate had been steady. The question which is relevant for the Reserve Bank Board at present is, first and foremost, whether the recent changes in mortgage rates result in an effective set of financial conditions which is ‘too tight’ for the economy.”
He appeared to knock that idea on the head of cutting rates just to offset the increase in mortgage rates when he said “It’s worth noting that over the course of 2014 and 2015, effective rates on most loans tended to decline by more than the cash rate, reflecting both declining funding costs and increased competition to lend. For fixed rate mortgages and many business loan rates the fall was quite marked. The average rate on outstanding business loans, for example, fell by over 90 basis points during a period in which the cash rate fell by 50 basis points. Even for floating rate mortgages, rates had fallen a bit more than the cash rate. The actions of those banks that have lifted mortgage rates over recent weeks reverse a little under half of this year’s decline for floating rate mortgages for owner-occupiers and have no effect, at this stage, on the 15 per cent of loans with fixed rates. (Ed: our emphasis) For investors in housing, these actions and those [of] a month or two earlier reverse the effects of this year’s monetary policy easing but, of course, this was the lending that had been growing most quickly. Business loan rates have not risen.”