Monetary Policy Might Be Discredited. But It Needn't Determine Your Mortgage Rate
Michele Bullock answering questions from the House of Representatives Standing Committee on Economics, Sydney, February 2018. Source: RBA
For the last 40 years, lively economic debate was really limited to trading room toilets, the AFR's Chanticleer column and the now classic Paul Keating outburst.
But has there ever been a time when the Reserve Bank of Australia (RBA) has been under such scrutiny?
Besides this very week in 1983, when the decision was made to float the Australian Dollar.
Over the past 40 years, the economy has changed society — a great deal. To borrow the marketing slogan, we really do live in Financial Times.
This makes interest rates more important to so many Australians than at any point in our nation’s history.
While the RBA exists to maintain full employment and economic prosperity for the people of Australia, RBA Governor Michele Bullock’s commentary such as calling for unemployment and a lowering of living standards is curious in the least, particularly in the name of a measure of inflation that has many other causes — like price rises set by large Australian businesses. It is also curious that the people serving on the Board of the RBA worked for or represent those businesses. Despite maintenance of corporate profit margins, real wages have declined.
No wonder the RBA is under such scrutiny.
As a mortgage broker, why does this matter?
Well, most people believe the RBA's decisions set the price of mortgages in Australia.
It might be true.
When I ring the bank and ensure my clients maintain — at the very most — the same margin over the RBA cash rate as when they first settled the loan, it seems the RBA are the arbiters of what my clients mortgage rate is.
Of course, we all expect the banks to pass on any changes in the RBA cash rate. Any banks that don’t end up getting berated by politicians — almost instantly these days.
But there's nothing in any loan document I have seen which says the interest rate is determined by the RBA. When large businesses borrow from the bank, they usually have a reference rate (such as 90-day bills) incorporated into the agreement.
The reality is that your interest rate is not tied to the RBA.
Just as influential as the Overnight Cash Rate on your mortgage rate is the competition in the lending market at the time your loan was settled.
What I can say is that the lending market right now is pretty hot.
Book a time to speak with me and we can see if the market has changed since you last looked at your loan. Your savings could fund a summer holiday, or if you’ve already booked, an upgraded one!