Rate hikes and rate cuts – while the RBA stays on hold

In another sign that APRA is doing the RBA’s heavy lifting, Westpac has announced changes to their home loan rates, following similar moves by other banks. It sees owner occupiers paying principal and interest (P&I) get an 8 basis point rate cut to 5.24%. This will please the RBA who would like to see some consumers get a bit more in their pocket as the economy remains below capacity. However, owner occupiers and investors who only pay interest (IO) get a 34 basis point rate hike to 5.83% and 6.30%, respectively. This will also please the RBA who has been concerned for some time that high leverage combined with high house prices can lead to system stability problems.

If they are targeting housing affordability the RBA should hike rates; if they are targeting economic growth the RBA should cut rates. Now they can sit tight and have the banks do it for them. The significantly wider gap between P&I and IO may even see some movement back to P&I, which would be welcomed by regulators.

This backs our view that the RBA cash rate is on hold for 2017, but we still see two rate cuts in 2018 as housing weakens, with inflation and wages remaining low.

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