Non-banks to gain from ECB moves

Last Thursday the ECB cut its refinancing and deposit rates and introduced a series of cheap loans to euro-zone banks.

“At the end of the day it means cheaper funding,” AMP Capital chief economist Shane Oliver told Mortgage Business.

“In a nutshell, what has happened with the ECB moves is that the interest rate structure across Europe has fallen,” Mr Oliver said.

“The ECB is pumping cash into the system and that is pushing down bond yields in Europe, which in turn means the cost of money for private borrowers in Europe has also declined,” he said.

“If the bond yield comes down it also means the cost of an Australian lender raising money in Europe has also come down.”

This has created an opportunity for lenders to take that money out of Europe and put it in Australia, Mr Oliver said, adding that the non-banks have the most to gain as they do not have access to deposits like Australian deposit-taking institutions (ADIs).

“In Australia, we still have a situation where 55 or 60 per cent of bank lending is funded through deposits, so there is not much impact there,” Mr Oliver said.

“To fund the remaining part, banks and particularly non-bank lenders will see a bigger impact,” he said.

“They will probably find some way to take advantage of the very low interest rates in Europe.”

At the peak of the eurozone crisis in 2011/2012, global funding costs spiked and Australian lenders split with the Reserve Bank’s official cash rate movements, much to the dismay of domestic borrowers.

“Australian banks were actually raising their mortgage rates ahead of the RBA and then when the RBA began cutting, the banks didn’t cut their rates as much,” Mr Oliver said.

“Now we are seeing a reverse of that, and it could potentially mean lower mortgage rates for Australian borrowers over time,” he said.