Interest Rates on the Decline

there’s been a few comments about rising interest rates in recent postings – doesn’t really fit in with this:

Westpac enters race to clip fixed rates
By Peter Weekes – ‘The Age’
September 25, 2004

Westpac yesterday joined the rush of home loan lenders that this week cut their three-year fixed rate to below the standard variable rate of 7.07 per cent.
Amid widespread market expectation and a sharp hint by the Reserve Bank that interest rates are set to rise later this year no matter who wins the election, it seems the bond market – where banks raise the funds for fixed loans – has another idea.
Westpac, Australia’s fourth-largest lender, slashed its rate to 6.69 per cent, following smaller players Adelaide Bank (6.5 per cent), Bank West (6.75) and Resi Mortgage (6.77). Wizard Home Loans plans to cut its rate to 7 per cent on Monday.
More could well be on the way, says Nicholas Gruen, chief executive of Peach Home Loans and former adviser to then federal treasurer John Dawkins.
“Borrowers can take their time, because if that’s the trend, it’s not going to turn around in a hurry,” says Mr Gruen, one of the first to recommend in June last year to lock in rates when the average three and five-year rates were well below the variable rate – a rare event.
James Dick, senior financial services analyst with rates monitoring firm Cannex, now doubts there is much chance of the Reserve Bank raising rates soon. As does a growing number of economists.
“Three months ago, the Cannex Updown Index was showing strong signs of a rate rise,” he says. “However, this has dissipated, probably due to the oil price acting as a proxy rate rise.”
CommSec chief equities economist Craig James says that while the economy has gained momentum in recent months, there is a “seemingly odd development – interest rates have actually been falling, not rising”.
He says three-year bond yields have fallen by almost a quarter of a percentage point in four months, averaging 5.22 per cent over September so far, from 5.43 per cent in May. And 10-year bonds have fallen half a point over the same period, to 5.46 per cent from 5.97 per cent.
Resi Mortgage managing director Peter James says he cut the fixed rate simply because the cost of funding has fallen as interest-rate sentiment has changed on the bond market.
“By reducing their rate, the fixed-rate market is telling us that they are not anticipating a price increase in the near future,” he says.
Will it last? Mr James says: “I don’t think anyone really knows, because a new statistic could come out tomorrow and the market may change its opinion.”
So, for those just meeting mortgage repayments, now may be a good time to consider switching to a fixed or split loan, he says. “If you are that close to the edge, you should certainly be fixing to take out the long-term risk (of rate rises), or maybe split the loan, because once you fix a loan you lose some of the benefits of increasing payments and redraw (facilities).”

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