Rate Cut

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CBA has today cut its one- and two-year fixed rates for owner-occupiers, but bucked the trend by hiking its four-year rate.

Following pressure from rivals Westpac and NAB, CBA has brought its two-year fixed rate to under 2 per cent.

However, the most significant change was the hike to its four-year fixed rate. This is the first big four bank to hike its four-year owner-occupier rate since October 2019 – a sign the bank is pricing in a higher cash rate from 2024.

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Sally Tindall, research director at RateCity.com.au, said the cuts to the bank’s four-year fixed rates could be a sign of things to come.

“CBA has bowed to market pressure by cutting its two-year rate to under 2 per cent,” she said.

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“However, the bank is giving with one hand, and taking away with the other, hiking its four-year fixed rate by the same amount for new customers."

“After the last RBA rate in November 2020, all four big banks responded by cutting fixed rates, in particular their four-year rates. Less than five months later, CBA has taken this deal off the table."

“It’s not surprising CBA has decided to raise its four-year fixed loan – the bank is pricing in at least one cash rate hike over this time."

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“Governor Lowe has repeatedly said the first round of cash rate hikes wouldn’t be until at least 2024, but that’s only three years away."

“Someone who fixes their rate for four years today could very well see variable rates go up within that time, provided the economic recovery stays on track."

“Other banks could start hiking their four- and five- year fixed rates in coming months to factor in a potential rate rise in 2024,” she concluded.
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CBA has today cut its one- and two-year fixed rates for owner-occupiers, but bucked the trend by hiking its four-year rate.

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CBA is the first of the Big Four banks to hike rates

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GUEST OBSERVER
Australia saw very strong jobs growth in October. Total employment rose by 58,600, the strongest since March 2012, driven by a 40,000 gain in full time jobs. Employment is up 2.7% on a year ago.
This pushed the unemployment rate down 5.9%, from 6.2% in September.
Jobs growth is very strong in NSW (3.8%yoy) and Victoria (+3%yoy) in contrast to WA which has slowed to +1.1%yoy. As a result unemployment is now falling in NSW (to 5.5%) and Victoria (5.6%) versus WA where unemployment has risen to 6.4%.
Hours worked are also strong at +1.2% month on month or +3.8% year on year.
There is a danger in reading too much into monthly jobs data as it can be quite volatile. For example in May unemployment similarly fell to 5.9% from 6.2% in response to a 50,000 jobs gain only to bounce back in subsequent months. 
Employment growth at 2.7% year on year has now also run well ahead of the growth suggested by leading jobs indicators such as the NAB Employment intentions survey. As a result a pullback in employment could be expected next month and just as we have seen on several occasions over the last year or so, it’s still premature to say we have seen the peak in unemployment.
<a href="/images/2015/11/12/Screen%20Shot%202015-11-12%20at%203.07.50%20PM.png" target="_blank">Click to enlarge</a>
<img src="/images/2015/11/12/Screen%20Shot%202015-11-12%20at%203.07.50%20PM.png" alt="" width="738" height="519">
That said, the ongoing strength in trend employment growth (now running at +19,000 jobs a month) is consistent with the economy continuing to hold up reasonably well helped along by the rebalancing of the economy evident in strong jobs growth in NSW and Victoria. 
As a result a December rate cut is now very unlikely and while I still lean to another rate cut early next year, it’s now a very close call, and we would need to see some softer economic data in the interim.
 
<a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank">SHANE OLIVER</a> is head of investment strategy and economics and chief economist at <a href="https://www.ampcapital.com.au/home" target="_blank">AMP Capital</a> and is responsible for AMP Capital's diversified investment funds.
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Australian jobs market booms, December rate cut unlikely: AMP Capital's Shane Oliver

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GUEST OBSERVER
Wild swings in global stock markets have made investors edgy, the economic news coming out of China is not favourable and domestic private investment has plummeted. On the other hand, US growth surged to 3.7% annually and fears of a debt crisis in the Euro zone have abated. Latest estimates still put inflation at 1.5%, below the Reserve Bank of Australia’s target band of 2-3%.
The Shadow Board’s confidence that the cash rate should remain at its current level of 2% equals 77% (up from 68% in August). The confidence that a rate cut is appropriate has edged up three percentage points, to 9%; conversely, the confidence that a rate increase, to 2.25% or higher, is called for, has decreased considerably for the third time in a row, from 35% in July and 25% in August to 14%.
Latest figures show that Australia’s unemployment rate increased to 6.3% in July, according to the Australian Bureau of Statistics, even though total employment rose by nearly 40,000 in July. Nominal wage growth remains muted at 2.3% and is forecast to remain low in the next quarter.
The Aussie dollar depreciated further against major currencies. It now fetches less than 72 US¢. Yields on Australian 10-year government bonds remain low at 2.71%.
As already pointed out in last month’s statement, the Australian property market appears to be cooling and the local sharemarket is retreating further from its highs earlier this year.
The elephant about to enter the room is the dramatic fall in new private capital expenditure, equalling a sizable 4.0% in the June quarter, bringing the annual decline to 10.5%, the largest drop since the last recession in 1992. The large drop is largely attributable to the contraction of the mining sector; however, firms in other sectors are also planning to cut spending, posing a serious threat to the Australian economy.
The recent gyrations in worldwide stock markets have highlighted the frothiness in global asset prices. To what extent volatility and uncertainty in asset markets spills over into the real economy is, of course, unclear. However, few economists doubt that asset markets are relying on ultra-low interest rates to persist. Concerns about any debt crisis in the Euro zone have waned since the recent 80 billion Euro credit extended to Greece.
As in previous months, the deteriorating outlook for the Chinese economy pose the biggest immediate threat to Australia’s export markets and thus to Australia’s GDP. US growth, on the other hand, has been revised up to 3.7% (annualized) for the second quarter 2015, presenting a dilemma for the Federal Reserve Bank: the strong economic performance suggests an increase in the federal funds rate is around the corner but if volatility in stock markets persists, signalling heightened uncertainty about the future, the Fed may be tempted to postpone the interest rate increase. Commodity prices have continued to fall, with crude oil dipping below $40 a barrel.
Also of concern is the sizable contraction of world trade in the first half of this year. The volume of global trade shrank by 0.5% in the June quarter, while the figures for the March quarter were revised to a 1.5% contraction, indicating that world trade recorded its largest contraction since the 2008 global financial crisis.
Consumer and producer sentiment measures paint a motley picture. The Westpac/Melbourne Institute Consumer Sentiment Index jumped from 92.3 in July to 99.5 in August. Business confidence, according to the NAB business survey slumped from 10 in July to 4 in August, at the same time as the AIG manufacturing and services indices, both considered leading economic indicators, recorded notable improvements.
What the Shadow Board believes
The probabilities at longer horizons are as follows: 6 months out, the estimated probability that the cash rate should remain at 2% equals 27% (23% in August). The estimated need for an interest rate increase lies at 65% (73% in August), while the need for a rate decrease is estimated at 8% (4% in August).
A year out, the Shadow Board members’ confidence in a required cash rate increase equals 72% (six percentage down from August), in a required cash rate decrease 9% (7% in August) and in a required hold of the cash rate 18% (up from 15% in August).
<a href="/images/2015/09/01/image-20150828-17468-1o4ret8.png" target="_blank">Click to enlarge</a>
 <img src="/images/2015/09/01/image-20150828-17468-1o4ret8.png" alt="">
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<img src="/images/2015/09/01/Screen%20Shot%202015-09-01%20at%207.25.56%20AM.png" alt="" width="765" height="469">
Comments from Shadow Board members
Mark Crosby, Associate Professor, Melbourne Business School:
“The longer term outlook is still uncertain.”
Recent global gyrations should make the RBA hold rates this month, and with a recovery in equity markets outside of China there seems little reason to cut rates. The longer term outlook is still uncertain, with global trade falls the most recent worrying data in the global economy and far more consequential than falls in Chinese equity markets.
 
Guay Lim, Professorial Fellow, Deputy Director, Melbourne Institute:
“International interest rates are likely to rise.”
International interest rates are likely to rise, as growth and employment in the US appear to be stabilising at normal rates. While Australian asset markets are expected to continue to be volatile, the exchange rate is expected to remain low. Keeping the official rate steady at 2% would help offset some of the negative effects of uncertainty in the international environment on the domestic economy – as well keep the policy rate well above the zero lower bound.
 
James Morley, Professor of Economics and Associate Dean (Research) at UNSW Australia Business School:
“The RBA should not provide a ‘Greenspan put’.”
Given the recent turbulence in financial markets and underlying inflation being at the low end of the target range, the RBA should hold its policy rate steady rather than raise it. But with a stable real economy, an overheated housing market, and a low dollar stimulating the foreign sector, the RBA should not provide a “Greenspan put” by cutting rates in response to the stock market. Instead, it should carefully monitor conditions to determine when it will need to start raising the policy rate back towards its neutral level.
 
Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:
“Monetary policy needs to avoid reversing recent currency falls.”
The current fragility in global stock markets appears to be more of a dash to liquidity than to value. It is likely an over-reaction to expected future interest rate increases, beginning with the federal funds rate perhaps this year. Nevertheless some downward adjustment was probably necessary because the boom in global stock prices generally did not mirror the sluggish recovery in the global real economy.
The trade-weighted Australian dollar has fallen about 15% in the last year, and fortunately has not risen with the recent competitive depreciations across Asia. Monetary policy needs to avoid reversing this contributor to Australia’s improved export competitiveness. In the current volatile financial environment, the RBA should maintain the current cash rate in September, though I have modestly increased the probability of a desirable cut.
Timo Henckel is research associate, Centre for Applied Macroeconomic Analysis at Australian National University and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/timo-henckel-990" target="_blank">here</a>.
 
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Trouble looms, so rates should hold: Timo Henckel

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The Today show money correspondent Ross Greenwood advised the full 25% rate cut savings was worth $3.34 billion in potential stimulus – money back in the economy.
But not all banks are passing on the full cash rate cut.
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With some $1.33 trillion in home owner and investor home loans, <a href="https://www.9jumpin.com.au/show/today/videos/4207691939001/" target="_blank">Greenwood </a>calculated that on all banks passing the rate cut on in full.
However the Commonwealth Bank is only passing on part of Tuesday's cut in official rates to its home loan customers, but has interestingly also taken the step of raising some deposit interest rates.
The country's biggest bank has lowered its standard variable mortgage rates by 0.20 percentage points to 5.45%.
CBA's group executive for retail banking, Matt Comyn, said the bank had considered the needs of deposit customers as well as borrowers in its decision.
"Lifting the rates for our deposit customers at a time when the cash rate is decreasing recognises the importance of savings income, particularly for retirees and young people."
The CBA move comes after ANZ earlier said it would lower its standard variable home loan rate by 0.25 percentage points to 5.38%, effective Friday.
NAB has copied Commonwealth Bank's move to keep some of the Reserve Bank's 0.25 per cent cut to the cash rate. 
NAB will cut its standard variable rate to 5.43 per cent, with its lowest fixed rate at 4.49 per cent for one year and 4.59 per cent for five years. 
 
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