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RBA eyes cut as APRA urges scrapping of 7pc home loan buffer

Lex Hall with AAP  |  21 May 2019Text size  Decrease  Increase  |  
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Scott Morrison's dramatic election victory has received an economic double-shot in the form of a mooted fall in interest rates and a loosening of access to home loans.

In minutes released today from its May meeting, the Reserve Bank of Australia board has signalled it could cut the cash rate from its historic low of 1.5 per cent as early as next month if employment figures do not improve.

And the likelihood of a rate cut firmed earlier in the day when the Australian Prudential Regulation Authority suggested an easing in borrowing standards, by scrapping the hard 7 per cent floor rate mortgage lenders use in assessing serviceability in favour of a 2.5 per cent buffer.

Cut to cash rate likely 'appropriate': RBA

Today’s RBA minutes reveal board members explicitly acknowledged "a decrease ... would likely be appropriate if unemployment did not fall.”

A week after the RBA board meeting, official data showed the unemployment rate rose in April to a worse-than-expected 5.2 per cent.

"Members discussed the scenario where inflation did not move any higher and unemployment trended up, recognising that in those circumstances a decrease in the cash rate would likely be appropriate," according to the minutes.

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NAB markets economist Kaixin Owyong noted the minutes had also dropped the reference to "not a strong case" for a near-term move in the cash rate.

"We read this discussion as the board requiring the unemployment rate to fall to stay on hold, but the latest data shows the unemployment rate has trended up," Owyong said.

"Accordingly, we still forecast a 25bp rate cut in June."

The RBA said, for a second month in a row, board members noted any stimulating effect on the economy of a cut would likely be less than in the past given households have historically high levels of debt and against the backdrop of a faltering housing market.

"Nevertheless, a lower level of interest rates could still be expected to support the economy through a depreciation of the exchange rate and by reducing required interest payments on borrowing, freeing up cash for other expenditure," the minutes said.

APRA urges scrapping of 7pc home loan buffer

The move comes as APRA earlier in the day suggested banks change the way they assess customers' ability to meet their mortgage repayments in a move the prudential regulator says would probably let people borrow more.

APRA is proposing to remove guidance that customers should be able to repay their loan if their interest rate increased to at least 7 per cent, with a recommendation that lenders make calculations using a 2.5 per cent buffer.

APRA chairman Wayne Byres says low rates had left the 7 per cent mark too high, while the gap between owner-occupier and investor rates meant a single rate was no longer as appropriate.

The official cash rate was 2.5 per cent when APRA first introduced the serviceability guidance in December 2014 in an effort to reinforce sound residential lending standards.

It has since been at its historic low of 1.5 per cent for nearly three years and is tipped by economists to fall as low as 1 per cent by the end of 2019.

In the last week alone, 12 lenders cut fixed owner-occupier rates, while nine lenders cut fixed investment rates, according to Canstar.

Byres said the interest rate floor and buffer were crucial in limiting excessive borrowing in an environment of low interest rates and high household debt.

“In addition, the introduction of differential pricing in recent years – with a substantial gap emerging between interest rates for owner-occupiers with principal-and-interest loans on the one hand, and investors with interest-only loans on the other – has meant that the merits of a single floor rate across all products have been substantially reduced.

Byres said that while the reform was likely to allow people to borrow more it was “not intended to signify any lessening in the importance that APRA places on the maintenance of sound lending standards.”

Morningstar equity David Ellis welcomed APRA’s proposal, saying it may encourage lending and borrowing, which would in turn benefit the banks and the housing industry more broadly.

Royal Bank of Canada macro rates strategist Robert Thompson said the APRA move could strengthen the case for a lower cash rate.

"These measures would enhance the effectiveness of rate cuts by allowing serviceability assessments to track RBA rate cuts more closely," Thompson said.

Growing numbers of economists have been predicting two 0.25 percentage point rate cuts by the end of 2019.

Franklin Templeton’s director of fixed income, Andrew Canobi said the minutes today had formalised a clear easing bias at the RBA.

“The burden of proof is now clearly on the labour market to strengthen in order to avoid the need for rate cuts,” Canobi said. “Our research into the labour market and forward looking indicators tells us this looks unlikely.”

The Australian dollar ticked as much as 0.2 per cent lower against its US counterpart on the release of the minutes and, at 12.48 Sydney time, was worth 69.12 US cents.

The APRA news spurred bank shares, with ANZ up 5 per cent and the Commonwealth Bank up 3.1 per cent, while the Australian dollar rose 22 points to an intraday high of US69.29c.

APRA will undertake a month-long consultation, but the reforms are expected to pass.


. Lex Hall is content editor with Morningstar Australia

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