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Borrowers may not feel the benefit of Australia rate cuts

29 March 2019

The economic outlook for Australia remains positive with the IMF forecasting the Australian economy to grow circa 14% over the next 5 years, well above those of our developed peers.

Late last year, signs of an economic turnaround were evident, with a resurgence in corporate profits, driven by the Mining, Utilities and Construction industries and economic growth figures above market expectations. However, the start of 2019 saw the Reserve Bank of Australia revising down growth forecasts for the year to come, although the resulting media hysteria overlooked the fact that these new growth forecasts were still well above long term averages. The ailing residential housing sector has also affected consumer and business sentiment.

Interestingly, cash rate expectations have been changing dramatically over the past 6 months, as a result of the divergence of the Australian economy. In March, the RBA left the cash rate unchanged at a record low 1.5%, where it has been for the past two and a half years. In December 2018 swap markets were forecasting the cash rate to rise 25 basis points by the end of this year. Now, however, we have market pundits pricing in three further rate cuts, with more than half the surveyed respondents expecting the cash rate to fall to 1% by the end of this year.

While, this may appear to be good news for borrowers and wholesale funding costs, what is being ignored is that Australian banks get nearly a quarter of their funding from overseas sources. With long term bond rates in the US now at a premium to those in Australia, our borrowing costs may stay flat, and even go up if there are consistent rises from our overseas funding sources, regardless of what happens with the base cash rate in Australia.

Coupled with a general cooling towards real estate lending amongst Australia’s largest banks, this could lead to more opportunities in Australia’s growing non- bank real estate finance sector.

Further reading:
Savills Australia Research