RBA has ‘ammunition’ but might not slash cash rate

Finsure managing director John Kolenda said that low inflation and the slow growth rate of mortgages has given the Reserve Bank of Australia (RBA) “ammunition to reduce its cash rate from the all-time low of 1.5 per cent” this month, but that he would not be surprised if the cash rate inertia continues.

“While I believe it would be an appropriate time and a relief to mortgage holders to reduce rates as early as next week due to all the recent domestic economic data and the continuing global headwinds, I would not be surprised if the RBA remains on the sidelines for a bit longer, although it’s a line ball decision,” he said.

The reason for Mr Kolenda’s scepticism towards the prediction that the RBA would slash the cash rate this month, he explained, is because the central bank would want to see “the impact of additional economic data” and might not want to make any decisions in the lead up to the federal election on 16 May.

“The central bank has maintained its holding pattern since August 2016, so they will be in no rush to act until they deem it absolutely necessary, but there has been some compelling evidence for them to finally get off the fence,” the Finsure managing director said.

Mr Kolenda, like economists such as Jonathan Pain, believes the rate cut will take place after the federal election, rather than next Tuesday (7 May) when the RBA board members meet.

“I still expect them to lower the cash rate over the coming months post the election. With further evidence of a slowing economy coming out of the latest RBA data showing a pronounced reduction in housing credit, it adds even more weight to reduce rates sooner rather than later,” he said.

The Finsure managing director’s comments follow predictions presented by a few analysts – including AMP chief economist Shane Oliver, NAB chief economist of markets Ivan Colhoun, and managing director of Market Economics Stephen Koukoulas – that the central bank would drop the cash rate in May amid new Australian Bureau of Statistics data reporting flat inflation growth.

However, Mr Kolenda pointed out that lenders don’t reduce interest rates based solely on what the RBA decides.

In fact, a long line of lenders – such as Bluebay Home Loans, Teachers Mutual Bank, ING, NAB, Virgin Money, Heritage Bank, Westpac, Commonwealth Bank, Bendigo Bank, Macquarie Bank, ME, HomeStart Finance and Adelaide Bank – have chosen to slash their fixed rates on home loans off the back of easing wholesale funding cost pressures.

“Banks are actually in a position to lower their rates independently of any decisions by the central bank,” the managing director said.

“Their funding costs have been falling and they could cut rates to offset some increases they imposed last year that were driven by rising funding costs.”

Mr Kolenda observed that lenders are continuing to interrogate customer living expenses when considering loan applications, which is having an impact on approval times.

“It’s still taking much longer to get approvals and, in many cases, find a suitable lender where a customer qualifies. The extremely tight lending regime has been frustrating for mortgage brokers with a significant increase in approval times,” he said.

[Related: Economist predicts 0.5% cash rate within two years]