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Lenders widen gap between discount floating and fixed rates to guard against possible RBA rate cut

31 January 2019

Lenders are preparing for a possible interest rate cut from the RBA by letting the discount rate between floating and fixed rates widen by up to 30 per cent.

In the last 12 months the difference between the three-year fixed home loan and average standard variable rate has increased by ten basis points, moving from 29 basis points to 39 basis points.

Analysts say it’s a strategic hedging of bets in case of an RBA rate cut.

“That fixed-rate mortgages are below variable rate mortgages suggests if anything that lenders might expect rates to fall,” AMP chief economist Shane Oliver told Australian Financial Review.

 “The widening in the discount likely reflects a decline in bond yields which drives the cost of funding for fixed rate loans but a rise in bank bill rates which has effected the cost of funding for variable rate loans,” he said.

Capital Economics predict interest rates to be cut to 1 per cent by mid-2020.

In contrast, the median economist survey in AFR in December predicts rates to be hiked by June this year.

The RBA will meet for the first time this year next week surrounded by uncertainty as to how far property prices will fall.

Inflation figures out this week revealed a higher-than-expected 1.8 per cent but it still remains stubbornly sluggish.

Inflation has continually come in under the RBA’s target of 2-3 per cent for a record three years.

JP Morgan economist Tom Kennedy told AFR the inflation figures won’t change the RBA’s statement next week.

“The bank has shown itself to be patient with the inflation trajectory, so long as the medium-term forecast remain consistent with an eventual return to target and improvement can be seen in labour market indicators,” he said.

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