1. Home
  2.  / Economy Up Rates Down

Economy Up Rates Down

The economy is looking better than expected, and the Government’s Funding for Lending scheme means rates are likely to go lower, writes Ryan Smuts.

By: Ryan Smuts

1 December 2020

The economy is holding up better than expected with unemployment lower than predicted, and our deficit less than expected thanks to surprisingly strong domestic spending figures and government expenditure coming in lower.

Inflation is still projected to stay very low and we are likely to see an increase in unemployment over 2021, which is part of the reason the Reserve Bank has been kept busy of late and are in the process of working on a number of tools designed to keep interest rates low for an extended period. Meanwhile, we hope that the positive news we are starting to hear about a vaccine eventuates into something more over the next few months.

Government has announced the plan to spend $28 billion on a Funding for Lending scheme which is to start in December. The intention is to lend the banks cheap money which they will then be expected to lend to customers to lower rates even further than where they are currently.

The Reserve Bank has kept the official cash rate at 0.25% although the banks are expected to be in a position by the end of this year to have their software in place so the Reserve Bank can take the cash rate negative (should they decide even more rate reductions are in the best interests of the economy). Adrian Orr signaled back in March that he would keep the cash rate unchanged to at least March 2021 and there are now a number of commentators who are questioning whether a further reduction will be required.

Rates Dip Further

Bank rates have started to slip a bit further with a number of them having reduced one, two and three-year pricing over the last month. It is expected that the Funding for Lending programme mentioned above may see short-term rates drop down into the 1.5-2% range. Lower home loan rates have definitely played their part in making the property market take off from lockdown and if we see them drop further it is unlikely that the re-implementation of the investment mortgage loan-to-value ratio (LVR) rules will slow the market down too much.

On that subject: while the banks were given until March, we saw across the board all banks bring them back early. It will be interesting to see if that is the only change as banks haven’t really relaxed that much this year in the above 80% loan-to-value ratio space which tends to be dominated by first home buyers. At the time of writing we are just a few days out from the Reserve Bank issuing their Financial Stability Report which will give a more thorough reference point as to how we may see the mortgage lending market play out next year.


Related Articles