Australia could be on the path to negative interest rates where borrowers are paid to take out a home loan despite this radical option being ruled out.
The Reserve Bank of Australia on Tuesday trimmed the cash rate to a new record-low of 0.1 per cent.
A day later, three of Australia’s big four banks slashed their fixed mortgage rates to levels below two per cent for the first time ever.
RBA governor Philip Lowe ruled out taking interest rates to negative levels as he announced a rate cut shortly before the Melbourne Cup describing this option as ‘extraordinarily unlikely’.
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Australia could be on the path to negative interest rates where borrowers are paid to take out a home loan despite this radical option being ruled out. Pictured is a stock image
‘There has been no change to the board’s view that there is little to be gained from lowering the policy rate into negative territory,’ he said.
‘While a negative rate might lead to a helpful depreciation of the Australian dollar, it could impair the supply of credit to the economy and lead some people to save more, rather than spend more.’
Reserve Bank governor Philip Lowe ruled out taking interest rates to negative levels as he announced a rate cut shortly before the Melbourne Cup describing this option as ‘extraordinarily unlikely’
Nonetheless Digital Finance Analytics principal Martin North, a financial analyst, said Dr Lowe had previously ruled out cutting rates to new record lows only to do so, making negative interest rates a possibility.
‘He previously said rates won’t drop below 1.5 per cent then said they won’t drop below 0.75 per cent so do we believe him on negative rates?,’ he asked.
In a video discussion, Canstar group executive of financial services Steve Mickenbecker said negative interest rates were unlikely for now.
‘I would hate to think we would get to the point of negative interest rates,’ he said.
‘The moral impetus for responsible decision making disappears when you’re being paid to borrow and some dumb decisions will be made, short-term decisions, some ridiculous investments.
‘It’s just a dangerous place to be and it’s also such a bad signal about the economy.’
The Reserve Bank of Australia on Tuesday trimmed the cash rate to a new record-low of 0.1 per cent. Pictured is the Sydney Opera House, a short jog from the Reserve Bank of Australia building
Negative interest rates exist in Denmark, Switzerland and Japan and are at zero in Sweden.
Australia’s cheapest home loans
Reduce Home Loans Rate Cutter Variable: 1.77 per cent
Homestar Finance Star Gold variable: 1.79 per cent
Pacific Mortgage Group variable loans: 1.89 per cent
National Australia Bank four-year fixed rate: 1.98 per cent
Commonwealth Bank of Australia Wealth Package four-year fixed rate: 1.99 per cent
Westpac Premier Advantage Package four-year fixed rate: 1.99 per cent
ANZ Breakfree package one, two three-year fixed rate: 2.09 per cent
NAB two and three-year fixed rate: 2.09 per cent
Westpac Premier Advantage Packet two and three-year fixed rate: 2.09 per cent
CBA two and three-year fixed: 2.14 per cent
CBA one-year fixed: 2.19 per cent
Athena variable loans: 2.19 per cent
Freedom Lend: 2.19 per cent
ANZ four and five-year fixed rate: 2.29 per cent
Source: Canstar, Finder, major banks
Denmark’s central bank, known as the Danmarks Nationalbank, has a minus 0.6 per cent rate for deposit accounts.
Since 2019, the Danish Jyske Bank, has offered home borrowers a negative annual rate of 0.5 per cent for ten years.
A rival bank, Nordea, offered the minus 0.5 per cent rate for 30 years.
Dr Lowe in August last year told a parliamentary hearing it was ‘unlikely but it is possible’ interest rates could hit zero.
This was five months before coronavirus came to Australia and seven months before the COVID-19 shutdown of service businesses sparked the first recession in almost three decades.
As Australia faced a record economic downturn, the Reserve Bank cut interest rates twice in March, to a then record-low of 0.25 per cent, and engaged in quantitative easing, where the RBA buys government bonds from the banks in a bid to encourage more lending.
As recently as September, the RBA’s deputy governor Guy Debelle said negative interest rates were being considered.
‘A fourth option is negative rates,’ he said.
On Wednesday morning, the Commonwealth Bank – Australia’s biggest home lender – announced it would slash its four-year fixed rate by one percentage point to an all-time low of 1.99 per cent for owner occupiers paying off a principal and interest Wealth Package loan.
Westpac, Australia’s second biggest bank, matched CBA three hours after its rival’s announcement by cutting its four-year, fixed interest rate by 0.8 percentage points to 1.99 per cent for owner-occupiers with a Premier Advantage Package loan.
National Australia Bank – another four hours later – cut its four-year fixed rate by 0.81 percentage points to 1.98 per cent – the lowest of the big four banks.
ANZ on late Wednesday afternoon announced it was follow the lead of its three major competitors and cut mortgage rates.
But with a one, two and three-year fixed rates of 2.09, it is the only bank that doesn’t have a fixed mortgage rate below two per cent.
None of the big four banks cut their standard variable lending rates, a day after Dr Lowe said interest rates would be likely to remain at record-low levels for at least three years.
Denmark’s central bank, known as the Danmarks Nationalbank, has a minus 0.6 per cent rate for deposit accounts. Since 2019, the Danish Jyske Bank, has offered home borrowers a negative annual rate of 0.5 per cent for ten years. Pictured is Copenhagen