RBA’s Guy Debelle says average mortgage rates have further to fall

RBA deputy governor Guy Debelle says the ‘steady decline’ in average mortgage rates will continue for a while yet.

Deputy Governor of the Reserve Bank of Australia Guy Debelle. Picture: AAP

Reserve Bank deputy governor Guy Debelle says the “steady decline” in average mortgage rates since the central bank launched its major monetary policy easing in March will “continue for a while yet”, even as he conceded that lower borrowing costs have so far done little to drive business borrowing amid the deep COVID-19 recession.

In a speech to the Australian Business Economists on Tuesday afternoon, Dr Debelle pointed to the RBA’s success in pushing down borrowing costs for individuals and firms.

“The lower borrowing rates will encourage businesses and households to borrow, invest and spend when they are confident about their future prospects,” Dr Debelle said.

But amid hopes of a faster paced economic recovery, the deputy governor remained cautious.

“While the news about vaccines should help bolster that confidence, the recovery will be uneven,” he said, adding: “it is likely to be some time before the vaccines will be widely available and distributed”.

With wages growth historically low amid expectations unemployment will remain elevated for an extended period, Dr Debelle reiterated that “given the outlook for the labour market and the economy, the board does not expect to increase the cash rate for at least 3 years.”

In addition to helping support the economic recovery by lowering borrowing costs significantly over the past eight months, Dr Debelle said the RBA’s $100bn bond buying program has contributed to a 5 per cent drop in the Australian dollar since expectations for an Australian QE program began in early September.

“It is reasonable to attribute the bulk of this depreciation to the growing expectation of the package announced in November,” Dr Debelle said.

He said there was a “marked decline” in fixed rate mortgages since March, when the RBA announced an emergency rate cut and that it would intervene to lower three-year bond yields to its policy target.

Advertised fixed three-year mortgages are now close to 2 per cent on average. The fall in new variable loans has been less, but borrowers are still able to get big four bank mortgages below 3 per cent and average borrowing rates across households continue to decline amid record refinancing activity.

RBA governor Philip Lowe has said borrowers should be agitating for further discounts from their lenders, or looking for a better deal elsewhere.

“We expect the steady decline in the average mortgage interest rate paid by households to continue for a while yet,” he said.

Dr Debelle also batted away concerns that rates at close to zero were punishing savers – mostly retirees – who rely on income from deposits, saying the boost to borrowers’ cash flows outweighed the cost to savers.

“Those who benefit most from lower mortgage rates tend to be younger, while those who depend on interest income are generally aged over 65,” he said.

When the cash rate was at 1.5 per cent, around 5 per cent of these older households were earning more than one-fifth of their income from interest, he said.

“Hence the effect of monetary easing falls unevenly across the community, although so does the incidence of unemployment. That said, the impact on the household sector in aggregate is clearly positive.”