A Welcome Prediction: Up to $2,200 Savings for Mortgage Holders if RBA Would Cut Overnight Cash Rate to 2% in 2013

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By Vittorio Hernandez | December 18, 2012 11:28 AM EST

While much of the world is engrossed in the Mayan calendar prediction that the world could end on Friday, Dec 21, a forecast by ANZ Bank will bring a smile to Australian borrowers. The ANZ believes the Reserve Bank of Australia (RBA) would cut the current overnight cash rate of 3 per cent to 2 per cent.

The RBA just cut the overnight cash rate to 3 per cent on Dec 4, bringing the key lending rate to a 3-year low.

ANZ economists cited the weaker mining conditions, the slow recovery of the non-mining sector and a substantial decline in job advertising were cited as the reasons why the bank, which has generally been independent of RBA rate decision, thinks there would be four more interest rate cuts of 25 basis points in 2013.

The 1 per cent reduction, which would result in a 100-year-low benchmark lending rate of 2 per cent, would mean a savings of about $2,200 a year for borrowers.

However, for depositors, it would mean lesser incentives to save because interest on cash management accounts is already down to 1.7 per cent, online accounts to 3.05 per cent and building society and credit union accounts to 0.5 per cent.

On a monthly basis, the savings is estimated at $182 on a $300,000 loan if the banks would pass 20 basis points out of a 25 basis points rate cut and pocket the remaining 5 per cent.

"The economy has grown below trend in each of the past two quarters. Real net disposable income fell in the September quarter. The key issue is whether the weakest sectors of the economy - retail, housing, manufacturing and non-mining investment - will strengthen sufficiently to offset anticipated slowing in mining investment. The Reserve Bank's two most recent interest rate cuts suggest it wants further insurance," ANZ head of Australian research Ivan Colhoun said in a statement.

"Each of these trends, if maintained, warns of slower economic growth ahead and of the need for further policy stimulus to avoid a further rise in unemployment. This will likely require a further 0.50 to 1.00 of rate cuts in 2013 - with the bigger figure likely if the Australian dollar remains high or rises further," he added.

Mr Colhoun's forecast is in line with a speech delivered last week by RBA Deputy Governor Philip Lowe, who said the average level of interest rates would most likely be lower for long than in the past because of altered global economic conditions and Aussie households saving an average of 10 per cent of their income, which is unusually large.

ANZ cited the bank's job ad index which went down to 2.9 per cent in November, the eighth consecutive month of falls for the index. Mr Colhoun said job advert drops were particularly felt in Western Australia and Queensland.

HSBC, in contrast, believes the overnight cash rate would go up by 25 basis points to 3.25 per cent next year. HSBC chief economist Paul Bloxham said the higher key lending rate forecast is on account of the Australian economy continuing to rebalance and the housing sector and retail sales helping fill some of the gaps left by the mining sector.

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