Weathering the Storm

If the RBA cuts the official cash rate today, as many economists predict they will (although this often counts for nothing), it will be to an all-time low of 3%. These pre-emptive cuts are due to forecasts of global doom and softer domestic growth and investment.

Currently, fixed rate home loans are the cheapest they’ve been since electronic records began in 1990. On the other side of this, the average online savings rate is only 0.15 percentage points above its all-time low. These lower interest rates help stimulate borrowing and bolster asset prices. This pattern is already underway – the number of home loan approvals has risen at a double-digit annual rate since May, coinciding with capital gains in the Australian market from the same month. Moody’s has also reported that the share of borrowers in arrears has decreased by 0.37%, to 1.29%.

Bank funding costs have also decreased. While the RBA has cut the cash rate by 1.5%, banks on average have only passed on 1.15%, but the average online savings rate has dropped 1.3%. Bank margins are therefore improving.

This low interest rate environment is coinciding with a marked increase in consumer confidence, in particular in NSW, Victoria and WA.

Australia’s economic profile will come into sharper focus during the week when we receive the September quarter GDP data and the jobless survey, but it seems that whatever eventuates globally, our current domestic economic fundamentals can weather the storm.

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