Competition driving cuts: Economist

Increased competition in the mortgage market, not future cash rate expectations or cheaper funding, is the driving force behind recent fixed rate cuts, according to a leading economist.

Following a wave of fixed rate rises on over 180 products late last year, several lenders, including two major banks, have recently cut fixed rates despite the broad trend of longer-term borrowing costs increasing, according to AMP chief economist Shane Oliver.

“The more recent moves seem to be more reflective of competitive positions,” he said.

Mr Oliver dismissed suggestions that the downward movement in fixed rates was a reflection of lender expectations of further cash rate cuts.

“There seems to be a fair bit of competitive pressure in the market and so that is probably playing a bigger role than a change in the banks' expectations regarding short-term interest rates,” he said.

While bond yields, a broad indication of long-term funding costs, have come off a little following some mixed economic data released this year, including weak job data and strong retail figures, Mr Oliver said he expected funding costs to continue to rise throughout the year.

Meanwhile, HSBC chief economist Paul Bloxham gave more weight to the easing in bond yields saying a stabilised global economy and downward pressures on funding costs have played a role in reducing fixed rates.

“The cost of funding has continued to drift downward in recent times as financial conditions globally have stabilised,” he said.

Talking in broad terms about a current reason for rate cuts, Mr Bloxham said that “more than anything else, it’s probably that the global cost of funding has been drifting downwards”.

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