Mortgage customers could benefit from global shift

Speaking to Mortgage Business, AMP Capital’s chief economist, Shane Oliver, has said that expected rate cuts from the Federal Reserve in the United States and from the European Central Bank (ECB) could alleviate funding costs pressures for Australia’s banks, reducing their exposure to mortgage rate cuts.  

Both the Federal Reserve and the ECB have signalled that they will look to lower rates in the coming months, with Mr Oliver expecting the former to drop rates twice in 2019.

Following the Reserve Bank of Australia’s (RBA) decision to cut the official cash rate for the first time in two and a half years, some lenders opted not to pass on the cut in full, citing margin pressures and considerations for deposit customers.

However, Mr Oliver has stated that rate cuts from foreign central banks could ease margin pressures via a lower bank bill swap rate.

“Last year, the big concern was that global monetary policy was tightening the cost of funds for the banks, which was going up,” Mr Oliver said.

“[As a result], banks had to raise mortgage rates by 10 to 15bps around August-September.

“Now, with the reversal by the Fed and the ECB, that results in further downwards pressure on banks’ funding costs, to the extent that global funding becomes cheaper and of course that has some impact on our bank bill swap rates.”

He added: “It could lower funding costs for the banks, which makes it easier for the banks to pass on lower mortgage rates.”

Bank margins are set to be tested again in the coming months, with further monetary policy adjustments from the RBA expected.

In minutes released from the RBA’s board meeting, the central bank acknowledged that further cuts to the cash rate are “more likely than not”.

The RBA’s unusually strong signal to the market prompted observers to predict back-to-back rate cuts in July and August, as part of an aggressive strategy to stimulate the labour market.    

The central bank’s next monetary policy board meeting is scheduled for next Tuesday (2 July).

[Related: RBA faces dilemma as global markets turn]