Will Interest Rates Go Lower in 2015?

The Australia and New Zealand Banking Group Limited (ANZ) is now the third bank of the four big banks to forecast not one, but two cuts to the Reserve Bank of Australia’s (RBA) cash rate in 2015.

Westpac and National Australia Bank (NAB) were the first to the party with their predictions of weaker growth and lower inflation, driving the cash rate down to two percent. Commonwealth Bank is singing a different tune and expects the cash rate to remain steady at 2.5 percent throughout the year.

Central banks tend to send conflicting messages to keep as many people happy, and guessing, as possible. If you review the minutes from the RBA’s December meeting, there was talk about growing expectations for a rate cut, and also a conviction that Australia needs a period of stability in interest rates. Try to figure that one out. Either way, at least they can say that they were right.

The RBA Cash Rate: Why You Should Care

The RBA exists to provide liquidity, which means the availability of money, to the Australian government and its people through the banking system.The RBA’s stated goals are to keep currency stable, maintain a high level of employment, and promote the general welfare and prosperity of the Australian people. They plan to do this by keeping inflation in the two to three percent range.

The RBA accomplishes these goals primarily through intervening in the economy by manipulating the cash rate.

The cash rate is the interest rate on overnight loans in the money market. This is the rate that Australian banks and intermediaries charge one another for the short-term use of funds.

If the RBA wants a lower cash rate, it will increase the supply and availability of money, making money less expensive, creating a lower interest rate.

Conversely, to increase the cash rate, it will decrease the supply and availability of money, making it more costly, producing a higher interest rate. This is nothing more than supply and demand economics 101.

This manipulation of the cash rate has a powerful knock on effect for interest rates in the broader economy. When the cash rate drops, banks pay less for overnight access to money. They, in turn, need to charge their customers less in order to make the same amount of money. In other words, your mortgage payment should be theoretically lower when the cash rate drops.

A Brief Look At The Historical Data

At 2.5 percent, the current cash rate is the lowest in history. It has remained steady at this level for the past 16 months of RBA meetings. This has translated into mortgage rates in the 4.5 to 5.5 percent range. However, if you go back to 1990, the cash rate was a whopping 17.5 percent. How would an interest rate like that impact the cash flow on your rental property portfolio today? You can have a look at the data for yourself here.

Lower Cash Rates And Your Mortgage Payments

Does a lower cash rate mean your mortgage payments will go down? Well, that’s the idea.

But it doesn’t always play out that way. You can bet that if the RBA raises the cash rate, your bank will pass that increased cost onto you.

But when the RBA lowers the cash rate, the banks decide whether or not they want to keep their profit level the same, or increase their profits by pocketing their savings.

As a result, banks do not always decrease their interest rates in perfect correlation with decreases in the RBA’s cash rate.

Why not? Well, because the free market says they don’t need to. If you owned a business and your costs went down, but people were willing to keep paying you the same amount that they had always been paying, what would you do? Until you faced a backlash, you’d probably keep charging the most you could to enhance your profits.

Between November 2011 and March 2013, the RBA lowered the cash rate from 4.75 percent to three percent. Over that time period, the big four banks pocketed almost an extra $1 billion each in additional profits from not passing on interest rate cuts. Can you blame them?

Of course, this really made a lot of people angry. By May of 2013, the big banks were rushing to lower interest rates as they sensed the tide of public opinion turning against them.

Citing decreases in overseas funding costs, the chairman of the Australian Competition and Consumer Commission was quoted last year, going so far as to say, “We’re owed an interest rate cut,” from the big banks. And this is after many months of the RBA keeping the interest rates steady. Many Australians would probably agree.

The fact is, banks owe us nothing. Bank policy makers exist to increase shareholder profits. They will set interest rates at whatever level will promote this objective. If the competitive environment will allow them to keep interest rates higher, that’s what they will do.

The answer is not to moan and complain about what’s unfair, but to enforce what competition does exist to make the market more efficient.

Take Matters Into Your Own Hands

I wrote a few months ago about one of the students I coached in Steve’s Property Apprenticeship course who took matters into his own hands, and lowered his own interest rate.

He had his loans with a traditional bank at an interest rate of 5.3 percent. After doing some research by speaking to a few mortgage brokers, he learned which lenders were offering the best rates.

Armed with this information, he went back to his bank to sit down face to face with one of the lending managers.

He simply showed him what his options were in finding cheaper finance with another bank, and they instantly lowered his interest rate to 4.9 percent. This 0.4 percent decrease in interest saved him an additional $1,560 per year.

What Do You Think?

Will the interest rates go lower in 2015, or will they remain at current levels? When do you expect the next rate rise? Take a moment to leave your thoughts in the comment section below.

By Jason Staggers

Jason was a personal mentor working with Steve McKnight's Property Apprentices. He helped hundreds of investors apply Steve's teachings in the real world and achieve greater results on their journey to financial freedom. Jason now lives in Perth, WA where he leads Neuma Church.