One bank quietly cuts mortgage rate as future cash rate is predicted

One big bank has quietly cut its three-year fixed mortgage rates. This move signals a change of direction for where mortgages are going.

ANALYSIS

This week witnessed the first interest rate cuts in a new monetary easing cycle that will overtake the Reserve Bank in the second half of 2023.

The Commonwealth Bank quietly cut its three-year fixed mortgage rates 40 basis points to 5.59 per cent. This came in response to similar moves by smaller banks over the previous days.

Such fixed-rate mortgage moves are a useful guide to what the market and banks see coming from the RBA.

Cash rate futures are already forecasting two official interest rate cuts over the next 18 months:

Bond markets see similar effects from two rate cuts over the next three years, but nothing more:

(Three-year Australian bond yield)

Will there be two rate cuts in the next 18 months?

Is this a realistic assessment? There are reasons to think that deeper cuts are likely.

The RBA has paused its rate hiking campaign because it is trying to stay on a narrow path between a weakening economy and easing inflation. Inflation is still high but the fixed-rate mortgage reset is still to fully play out so there is a lot more embedded tightening to come that will directly impact household consumption.

Business investment would follow that down and the Aussie economy could stall, with a rising jobless rate through the second half of 2023. This would be made worse by rampant population growth courtesy of mass immigration. Wages growth is already stalling.

Then there is the international economy

The US is on the verge of recession as its small bank credit crunch lands on business. Europe is close on its heels as its banks tighten credit too:

(ECB bank lending standards)

Chinese recovery has so far failed to stop ongoing falls in Australia’s key commodity prices and will be hit harder as the Atlantic economies buckle.

And major central banks are still raising interest rates to quash wage growth despite these growing signals of economic weakness, raising the distinct prospect of an interest rate overshoot that triggers a growth undershoot in due course.

It is important to remember that the last three times that the US experienced an official recession – 1990, 2002, and 2008 – the Federal Reserve was forced to cut interest rates by a full -5 per cent as deflationary forces took hold.

In Australia, those three episodes of global weakness delivered rate-cutting cycles of -13 per cent, -2.5 per cent, and -5 per cent!

It may be that there are some inflationary forces still loose in the global economy but recessions have a habit of delivering downside price shocks that go well beyond expectations.

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geopolitics and economics portal. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

Originally published as One bank quietly cuts mortgage rate as future cash rate is predicted