Friday, 13 April 2012

Mortgage Rates and the ANZ: Hysterical reaction in historical perspective

The media coverage of the 6 basis point rise in ANZ's mortgage rate is bordering on the hysterical.  Some context please.  On a $300,000 mortgage, the 6 basis points is $2.69 a week or 38c a day.  Sure, no one likes paying more for anything, but it's not the move that will pole-axe consumer demand.

It is also worth remembering that the current level of mortgage rates is still around 1.1 percentage points lower than those prevailing when the "interest rates will always be lower under us" Liberal Party was last in power in November 2007.  We should note here that 6 months after the Liberal Party lost office in the 2007 election, mortgage rates got to 9.6% as the RBA tried to reel in the inflation pressures unleashed by pro-cyclical fiscal policy as Howard tried to buy favour with the electorate.  The current mortgage rate is about 2.1 percentage points lower than that.

The other very, very, very, very important thing to recall is that the RBA will take the moves in retail interest rates into account when setting official rates.  The recent increases in retail rates are a factor that will compel the RBA to cut official rates more than otherwise in the months ahead.  Get set for a 50 cut in May and probably more cuts in the second half of 2012.

So no more hysteria because there will be true interest rate relief in the months ahead.  It would not be surprising to see mortgage rates below 7% and perhaps on their way to 6.5% within the next 12 months.

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