Mortgage market heats up: What you need to know
It’s not just the weather that is heating up – the mortgage market is too. Our big banks like CBA, Westpac, Macquarie, and NAB have started cutting their fixed rates. CBA and Westpac have gone one step further and reduced rates on some variable loans. This is good news for us borrowers, and a step in the right direction. The US Federal Reserve Chairman, Jerome Powell, in his most recent speech over the weekend said, “The time has come for policy to adjust”, meaning official rates are about to be cut, over in the US. Despite how volatile and challenging the current economic landscape is, this speech has triggered markets around the world to feel a degree of optimism, which is also having an impact on us here in Australia.
Big banks trying to catch competitors
CBA’s recent cut to variable and fixed rates brings them closer to their competitors. They’re still not leading the market. These changes, effective from August 23, 2024, will likely prompt their existing borrowers to re-evaluate their current loans and potentially win a tad more business. We will likely see other banks follow suit too. We’ve also seen Westpac join the fray with aggressive variable pricing, lowering their fixed rates and intensifying the mortgage wars.
Competition, not the RBA, drives variable rate reductions
Competition is what is driving these out-of-cycle variable rate reductions, not the Reserve Bank of Australia (RBA). ANZ Research doesn’t think we will see the RBA cut the official cash rate until February 2025. In a recent statement to the House of Representatives, the RBA maintained a very cautious outlook, focusing on the labour market (jobs and wages) and inflation in general. What was clear was that nothing has changed. There is still a lot of uncertainty. ANZ made clear that a massive swing in the numbers, a shock even on inflation, is what would be needed to change the cash rate from its current 4.35 per cent between now, and the end of the year.
Market expectations and our RBA remaining cautious
Despite the cautious tone of the RBA in their most recent statement, the financial markets are not believing the RBA’s skeptics and are betting on a rate cut. Markets think the cash rate will be 3.5 per cent by the end of the year, according to AMP’s Economist, Diana Mousina.
This is what is causing the big banks like CBA and Westpac to drop fixed rates - it’s the markets. Fixed rates are priced off market expectations for interest rates. We saw this happen last year for a period too, when markets and bond yields behaved similarly and the banks lowered their fixed rates.
What is ahead: Key data and pressure on the RBA
While everything depends on upcoming data, Powell’s recent speech to the Federal Reserve Bank of Kansas City, shows that they in the US are positioning themselves for a rate cut in September. We’ve already seen New Zealand’s central bank start to cut rates too across the Tasman Sea. This Wednesday, August 28, we will see the monthly (July) consumer price index data released. This CPI indicator will give us an indication of what is happening domestically.
AMP believe inflation will drop to 3.3 per cent, down from 3.8 per cent last month. This is still above the RBA’s comfortable target range of 2-3 per cent, but in the right direction. The next RBA Board meeting is on 23-24 September. If inflation continues to cool, pressure will mount on the RBA to follow the direction of the rest of the world, and lower the cash rate.
Final thoughts
As we see competition heating up in the mortgage market, these rate reductions by our major banks such as CBA and Westpac, signal a possible shift in favour of the borrower. While the RBA remains cautious and glued to the data, global market trends and upcoming inflation data could influence the timing of future rate cuts here in Australia. The closer we stay to the data and these changing conditions, the more informed we are about making decisions that are in our best interests. This all makes for an environment where the borrower needs sound, objective, and well-informed general advice.
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