Home borrowers will have to wait at least another month for more relief on their mortgage repayments after the Reserve Bank kept official rates on hold at its March board meeting.
The decision took investors by surprise, with money market traders having factored in a 58 per cent chance of a 0.25 per cent reduction ahead of the announcement.
The central bank remains concerned that booming house prices in the nation’s capital cities – particularly in Sydney – carry significant risks for the economy.
RBA Governor Glenn Stevens noted that borrowing by housing investors continues to strengthen, while consumer demand and business investment remain “weak”.
Sydney’s overheating property market was a big factor weighing on the board’s decision.
“Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities over recent months,” Mr Stevens said.
“The Bank is working with other regulators to assess and contain risks that may arise from the housing market.”
Put simply, the RBA is worried that further rate cuts could foster unsustainable demand for housing property in our cities, especially Sydney.
Leading economist Stephen Koukoulas said a tightening of so-called “macro-prudential controls” was now almost inevitable to lighten risks in the property market.
The Australian Prudential Regulation Authority is considering raising the capital requirements on home loans written by the major banks – a move that will increase the cost of servicing mortgages.
“That should have been done last year,” Mr Koukoulas said.
More rate cuts still on the cards
The introduction of new capital controls on bank lending may clear the way for further rate cuts, after Mr Stevens signalled that the RBA remained predisposed to additional easing of monetary policy.
“Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target,” he said.
“The Board will further assess the case for such action at forthcoming meetings.”
Mr Koukoulas has forecast the central bank is likely to reduce the official cash rate – now at 2.25 per cent – to 1.5 per cent.
“I thought it would have been good to cut this month rather than wait and leave us with this guessing game again,” he said.
“It makes you wonder whether a less harsh federal budget is at the back of their minds.”
Mr Koukoulas and many other economists now suspect that borrowers may have to wait until May for the next rate reduction.
The next major release of economic data is not until April when quarterly inflation figures are published.
“We expect another cut in coming months, most likely in May, following the first quarter Consumer Price Index print,” said HSBC chief economist Paul Bloxham.
Meanwhile, credit card rates soar
Despite a stern warning from Federal Treasurer Joe Hockey for banks to pass on the February rate cut to credit card holders, most lenders snubbed the advice.
Instead of falling in line with official rates, the interest costs of many credit card products are soaring to record highs.
Market research conducted by financial products comparison site Mozo found that only one lender – Victoria Teachers Mutual Bank – passed on the full 0.25 per cent rate cut to credit card holders.
In a move likely to disgust some of its customers, Bankwest actually bumped up the rate on its Qantas Mastercard to 20.49 per cent, a 0.50 per cent hike.
The collective inertia of lenders following last month’s official rate cut means that card borrowers are now paying an average interest rate of 17.57 per cent on credit cards issued in Australia.
Mozo director Kirsty Lamont described the pricing practices of local lenders as punitive.
“Thousands of Australians are paying punitive interest rates on their credit card debt and the banks are clearly not interested in providing relief by cutting rates,” Ms Lamont said.
“Paying interest rates of 15 per cent or more on a credit card debt is basically throwing money down the drain.
“In fact Mozo calculates that credit card card interest costs Australians over $6 billion a year – more than we spend on smoking or gambling.”
Ms Lamont said the reluctance of banks to reprice credit cards was also reflected in the rates offered to small business borrowers.
“They’ve hardly moved at all this year,” she said.