Australia’s interest rates are low and staying low. Time to ask for a better home loan

The decision by the Reserve Bank to cut rates to near zero and undertake quantitative easing reveals just how big a hole the economy is in and also just how long it will take to get out of it.



the roof of a house: Photograph: Brook Mitchell/Getty Images


© Provided by The Guardian
Photograph: Brook Mitchell/Getty Images

It still takes some grasping just how low our interest rates are now – 0.1!

When John Howard bragged about “record low” rates back in 2002, the cash rate was 4.25%. I doubt we will ever see rates that high again.

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The reason I think 4.25% is beyond us is that to get back to that rate would require such a long and sustained boom that it would put the early 2000s mining boom in the shade.

Since the Reserve Bank began targeting an inflation rate of between 2% and 3% in the early 1990s, the biggest ever increase from the bank was a three percentage point increase from that “record low” 4.25% in April 2002 to 6.72% in March 2008.



the roof of a building: ‘We are obviously still in a recession, so in these hard times, make sure you are not paying more [on your mortgage] than you need to.’


© Photograph: Brook Mitchell/Getty Images
‘We are obviously still in a recession, so in these hard times, make sure you are not paying more [on your mortgage] than you need to.’

Related: Reserve bank slashes interest rate to historic low of 0.1% in bid to prop up Australian economy

That was six years of a mining boom the likes of which we will never see again. But were something like it to occur, even then we would only be up to 3.1% – just above the “emergency levels” of the GFC.

So greatly have things changed that prior to the GFC the neutral cash rate was around 4.75% – anything lower and the Reserve Bank was trying to stimulate the economy, anything higher and it was trying to settle things down to stop prices rising too fast.

But from September 2016 to June 2019 the RBA kept the cash rate steady at 1.5%.

Now to even get back to that level we would need at least two or three years of strong growth:

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But what the past 45 years also shows is just how different this recession is from that of the early 1980s and 1990s, and even the GFC.

In each of those three cases the collapse was presaged by a boom, with rates increased in an effort to keep a lid on inflation.

This time around we entered a recession despite interest rates not having been raised for a decade.

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And not only that, they had already been lowered to ever lower “record” levels.

It is why the Reserve Bank has also had to engage quantitative easing because as the governor, Philip Lowe, told reporters on Tuesday, “We’ve done as much as we can on interest rates and the focus now is on the quantity of asset purchases.”

Crucially, however, the strong growth that would cause rates to rise is not expected to happen anytime soon.

Governor Lowe told reporters that the bank would not look to raise interest rates again until the inflation rate was “sustainably within the target range” of 2%-3% . Crucially he noted that “it is not enough for inflation to be forecast to be in the target range”.

So what gets inflation rising at that rate? Strong employment growth, unemployment around 5% and, as Lowe noted, “a return to a tight labour market”.

That means an underutilisation rate (unemployment plus underemployment) of below 12% at least.

Right now 18.3% of the labour force in underutilised.

So to get anywhere near a “tight labour market” we would need roughly 850,000 people to either get a job or be comfortable with the hours they are working.

By targeting the 3-year government bond rate at 0.1%, that effectively means the Reserve Bank thinks for least three years you can expect the cash rate to stay where it is.

And we should not assume the rate is going to bound up.

We only need to look to Japan and the UK to see that once rates are low, they don’t necessarily go back up. And even the US, where rates rose off the back of Trump’s tax cuts massively increasing the deficit, they were beginning to come down even before the pandemic:

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The reality is the lower rates go the less impact a cut will have, but the more impact each increase does.

This is why the neutral rate is no longer 4.75% and probably even lower than 1.5% now.

But what is also interesting is how the RBA suggests you should react to the rate cuts.

Governor Lowe does not actually believe the average mortgage rate will decline too much. He noted that the big difference now from in the past is rather than wait for a lower rate, mortgage holders are shopping around.

We can see this with the comparison between the average mortgage rates being offered and the actual average rate paid by everyone with a mortgage:

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Governor Lowe confirmed on Tuesday that we are obviously still in a recession, so in these hard times, make sure you are not paying more than you need to.

A year ago I suggested you should ring your bank and ask for a better deal, and it remains my advice now.

But don’t just take my word, Governor Lowe also says you should ring your bank. On Tuesday he encouraged “everybody to go and ask their bank for a better deal. If they don’t give you a better deal after today’s decision, ask them, and if they won’t, switch to a bank that will”.

Good advice.

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