ECB to lower Australian mortgage costs?

ScreenHunter_2798 Jun. 06 14.36

By Leith van Onselen

The AFR is reporting this afternoon that the ECB’s decision to charge European banks negative interest rates for funds deposited with the central bank will likely lower Australian banks’ wholesale funding costs and potentially reduce mortgage rates:

…analysts believe Europe’s lenders will also be encouraged to invest in higher-returning assets overseas, including debt issued by big corporations, especially banks.

With local banks’ wholesale funding costs already at their lowest levels since the global financial crisis, such a shift is likely to further drag down the cost of raising money from global investors.

Macquarie analyst Mike Wiblin said the move to introduce negative interest rates could drive more European bank investors towards bonds or mortgage-backed securities issued by Australian banks, pushing down the sector’s funding costs.

If ever there was a time for APRA and the RBA to begin implementing macroprudential controls on mortgage lending, it is now. The last thing Australia needs is a further escalation of mortgage competition, lower lending standards, and further upward pressure on both house prices and the Australian dollar.

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Leith van Onselen
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  1. We have our SMSF and all our wealth geared to the max in Equities and IP . the capital gains and rent/ dividends giving +20% returns for FY14.

    At some stage we will start to offload assets , but this bull market in all assets isn’t over yet.

    • Schadenfreude

      Spoken like a true REA…

      Load up on more debt, not to worry it will all be Bonza old cobber.

      • Bonzas strategy may not be for all the rest of the clever people on this post but to be honest, it’s a less sophisticated version of what hedge funds have been doing the past 5 years … That is riding the central banks policy, following the liquidity and hopefully you let go before you reach the edge of the cliff. Good luck to him and I truly hope he makes a killing !

    • What’s your trigger point for offloading?

      What happens if you get caught in the mad rush out, if that’s what you’re suggesting might occur?

      What’s to say this can’t go on forever?!!

  2. Well B is right. This is a balance sheet recovery that is being pitched for, so every asset in the world is getting pumped at the expense of the currencies.

    And central banks are f88ked if they close the spigots, asset deflation will take the world to depression in a flash. Tangible assets are, well … tangible, fiat currencies are just the play dough of the central banks.

    • True. Unfortunately it is also what our incomes are paid in, which just makes the ongoing debasement even more insidious.

    • Yep, Bonza is responding to the policy settings supported by both sides of Oz politics.

      Apart from ideology there are no good reasons for a country to blindly import the monetary policies of foreign countries.

      Which is what we do when foreign central banks adopt ZIRP policies and we allow those rate structure decisions to determine our $AUS or interest rates.

      At the moment, because we do not regulate/restrict capital flow transactions in any significant way there would be two choices – assuming we did not already have a household debt mountain secured by housing asset prices.:

      1. Allow the $AUS to rise and hollow out the economy


      2. Drive interest rates down locally and maintain a lower $AUS but allow malinvestment (asset price inflation) across the country (MP is an attempt to force less malinvestment but getting it to work well would be a challenge as there is an ongoing incentive to evade the controls)

      Considering the pollies on both sides are clinging to neo- classical capital flow ideology and refuse to consider regulating some of the relevant capital flow transactions, that leaves the RBA but it has no real choice as its hand, to a large degree, is forced by the existing over investment in housing.

      The RBA cannot allow any significant deflation in house prices, yet it cannot goose them too much because that may lead to a blow out that snaps the market – once denying a bubble is impossible people will stand back and watch no matter what the interest rate.

      This is why talk of the RBA using interest rates to influence the exchange rate are delusional. It has a much bigger problem on its hands – an economy that has becoming completely dependent on household debt secured by property.

      A semi trailer heading up a narrow one way street to a dead end with no reverse gear.

      The ONLY solution is to stop the semi and disassemble it.