The Commonwealth Bank of Australia (CBA) has increased its serviceability floor rate to 5.25 per cent per annum, up from the previous floor rate of 5.10 per cent, effective 19 June.
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However, the major bank said its interest rate buffer of 2.50 per cent has remained unchanged.
Explaining the reason for the floor rate increase, a CBA spokesperson said that it is to ensure that CBA continues to lend responsibly in the current record-low interest rate environment, and added that it has formed a part of its regular monitoring and review of its policies and services.
The spokesperson also said that CBA has taken into consideration various factors, including the ongoing affordability for the bank’s customers during the life of their loan and any potential changes the customer may incur.
The spokesperson said: “In delivering this change, we have taken into consideration the external environment and our regulatory commitments, while remaining focused on delivering great customer outcomes.”
The lender also stated that it expects that the majority of new home loan applications would not be impacted by this change.
It also said that Macquarie has the highest floor rate among the “big five”, at 5.30 per cent.
In October 2020, Westpac and its subsidiaries dropped their floor rates by 25 bps to 5.05 per cent per annum, while in February 2020, ANZ reduced its floor rate from 5.50 per cent to 5.25 per cent per annum.
Other lenders such as Suncorp and P&N Bank (a division of Police and Nurses Ltd) also reduced their floor rates last year, while Auswide and Heritage Bank revised their interest rate floor in 2019 following APRA’s changes to its home lending guidance.
CBA predicts 15 bps rate rise in 2022
The big four bank has stated that its economists believe that the Reserve Bank of Australia (RBA) will raise the official cash rate from November 2022, well ahead of the 2024 timeline currently forecast by the central bank.
CBA head of Australian economics Gareth Aird said in a research note that the lender has pencilled in a first increase of 15 bps in November 2022, which would take the cash rate to 0.25 per cent.
“We expect that to be followed by an increase of 25 bps in December 2022. We have three further 25 bp hikes in QI 21, Q2 23, and Q3 23 that take the cash rate to 1.25 per cent,” Mr Aird said.
However, Mr Aird cautioned that there are scenarios that could result in the RBA pulling the rate hike trigger earlier than November 2022, particularly if they modify their reaction function because it becomes indisputable that wages growth is on a path to 3.00 per cent per annum (the rate of growth targeted by the central bank).
“Alternatively, the RBA could delay hiking the cash rate if growth in labour supply was to accelerate quickly when the international border is reopened,” he said.
Mr Aird said that CBA economists believe that the RBA would not be able to achieve their objectives of full employment and inflation sustainability within their target without federal government assistance, and added that, more specifically, fiscal settings need to remain stimulatory and net overseas immigration could not return to pre-COVID-19 levels if wages growth is to remain at 3.00 per cent per annum or above.
“As such, there are two key assumptions that underpin our RBA call:
- fiscal policy remains expansionary over the next few years; and
- net overseas immigration increases from mid-2022, but at a slower rate than pre-COVID,” Mr Aird said.
Mr Aird pointed out that for the past six months, CBA’s economic forecasts for the Australian economy have “been at odds” with the RBA’s “2024 at the earliest” forward guidance on the cash rate.
“But we have refrained from calling a hike in the cash rate until now because we believed that markets were more focused on the RBA’s policy decisions around yield curve control (YCC) and the bond-buying program,” Mr Aird said.
Commenting further on the rate predictions, Mr Aird said: “The Australian labour market has tightened at a phenomenal pace, and underutilisation in May was at its lowest since early 2013.
“The forward-looking indicators of labour demand are very strong, yet labour supply is constrained, which means the labour market will continue to tighten very quickly and wages growth will accelerate.
“The commonwealth fiscal stance as well as the targeted level of net overseas immigration in 2022-23 will have a large bearing on nominal wage outcomes and therefore the path of interest rates.”
Mr Aird’s predictions on rate moves by the RBA have come at the same time as comments by AMP Capital chief economist Dr Shane Oliver, who said that it is possible (as long as the COVID-19 spread is contained) that the conditions for higher rates (wages growth of 3.00 per cent or more and inflation sustainably within the 2.00 per cent to 3.00 per cent target) are met by late 2022, which would enable a cash rate hike simultaneously.
However, he added that his base case remains a cash rate hike in 2023.
ANZ economists recently predicted that the RBA could increase the cash rate in two steps in the first half of 2023 to take the cash rate to 0.5 per cent by the end of 2023.
[Related: Major banks revise house price predictions]