Working Papers

Consumers as Interest Rate Hawks

The February Westpac-Melbourne Institute Consumer Sentiment survey finds respondents expecting increases in mortgage interest rates in excess of 100 bp over the next 12 months.  While this is somewhat in excess of the tightening in official interest rates recently priced into the inter-bank futures strip, it is not necessarily inconsistent with market pricing.  Consumers are by now well aware that the official cash rate is not the only determinant of mortgage interest rates and that there is a trade-off between changes in mortgage interest rates and the official cash rate. 

Treasurer Wayne Swan continues to maintain that there is ‘no excuse’ for interest rate movements in excess of movements in the official cash rate.  If lenders were to have followed this advice in the past, then none of the benefits of lower funding costs from mortgage securitisation would have been passed on to borrowers before the onset of the credit crisis.  Moreover, any future improvement in capital market conditions could not be passed on to consumers, but would instead be hoarded by lenders with the Treasurer’s implicit blessing. 

posted on 11 February 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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Not only that, but presumably a narrowing of lending margins would diminish the incentives to get the mortgage securitisation market up and running again, which would be a more sustainable means of promoting competitive outcomes than temporary restraint on the part of the Big Four. In fact, a deliberate sacrifice of margins could even give rise to a s.46 TPA action against a Big Four bank.
BTW, Stephen, what’s your view of Chris Joye’s Aussie Post bank idea as a means of spurring lending competition? To me, it sounds like it would be a timebomb.

Posted by .(JavaScript must be enabled to view this email address)  on  02/11  at  07:42 PM

I don’t think consumers actually want narrow banking models, which is why the private sector doesn’t offer them.

The Japanese Postal Saving system did for Japan what Freddie and Fannie did to the United States.

Posted by skirchner  on  02/12  at  07:57 AM

I continue to be amazed at the deals currently on offer for term deposits.  Yesterday I got an 8 month term at 6.55%, which is close to current mortgage rates.  I can’t remember a time when banks were offering TD rates this close to mortgage rates on such short terms.  And for longer terms you could get 8% for a 5-year term from Westpac until a few weeks ago.

Are local banks struggling to raise funds overseas?  I this why there’s so much competition to attract local deposits?

Posted by .(JavaScript must be enabled to view this email address)  on  02/12  at  09:31 AM

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