Property Development

The Case for Not Passing on Cash Rate Cuts

Written by The ReReport
As seen in the Source link, written by on 2019-06-26 18:33:18

As this data shows, while on average the benefit of the reduction in mortgage interest rates to owner-occupier borrowers has been 218 basis points, the reduction in interest rates for savers has been significantly larger.

Mortgages are a generally large and significant debt, so many view the drop in mortgage interest rates as more beneficial, especially with the increased use of mortgage offset accounts over recent years.

However, with official interest rates as low as they are currently and savers having experienced much greater interest reductions than mortgage holders, it could be argued there is currently little benefit in saving.

While that may potentially be good for the economy (more spending) and lower interest rates are certainly perceived as good for mortgage holders, there is a fairly large proportion of the population that rely on savings as well as those that have little or no mortgage debt.

Another factor to consider is that the major banks, which account for the majority of mortgage lending in the country, remain heavily reliant on domestic deposits to fund their mortgage lending.

The latest data available shows that around two-thirds of major banks non-equity funding comes from domestic deposits.

Very low interest rates discourage saving and over time could lead to a drop in domestic deposits and an increase in the requirement for lenders to increase their reliance on other sources of funding (such as offshore).

Listed lenders also have a responsibility to their shareholders. Very low mortgage rates have the potential to further depress net interest margins.

This increases the likelihood that future cuts to the cash rate may not be passed on in full and likely explains why the reduction to deposit rates have to-date been larger than the cuts to mortgage interest rates.

As always when interest rates are changed there are winners and losers. For the most part the focus is on the benefit of lower interest rates for mortgage holders.

What is often forgotten in the conversation, and has been throughout the current rate cutting cycle, is how much lower interest rates hurt savers and disincentive saving.

Given cuts to interest rates for savers have been much greater than cuts to interest rates for mortgage holders and savers are not that much of a smaller cohort than mortgage holders it is reasonable for lenders to have greater consideration of the impact of the current ultra-low interest rates on this segment of the market.