Australia Markets open in 4 hrs 43 mins

Debelle urges patience on rate cut impact

Alex Druce
RBA reserve governor Guy Debelle says patience is needed for people to see the effect of rate cuts

Reserve Bank deputy governor Guy Debelle believes those who say interest rate cuts are no longer effective due to a lack of recent evidence locally are simply being impatient.

Philip Lowe's deputy told a Sydney audience on Friday that, despite disquiet over sluggish retail activity, rising unemployment and stagnant wage growth, it was too early to judge the impact of this year's three cash rate cuts.

"We started with an interest rate reduction in June, and here we are in November ... [so] the most recent data we have at best is for October, so not much time has gone past," Dr Debelle said at a Financial Services Institute of Australasia event.

"It is a question of instantaneous gratification and, as much as it's desirable very much in this day and age, and particularly by the media, monetary policy takes a while to get through."

Dr Debelle dismissed suggestions monetary policy was no longer effective but conceded its impact may have lessened.

"Despite many points to the contrary, monetary policy is still effective, possibly slightly less effective than in the past," he said.

He said people may not have been reducing mortgage repayments with each rate cut - instead preferring to pay off loans more quickly - but they had been bargaining with their bank for cheaper terms, which he said reflected in 60 of 75 basis points flowing through to the average mortgage rate reduction.

Dr Debelle said this could potentially reach 65 basis points by the end of the year.

"People are waking up to this gradually and refinancing with cheaper rates," he said.

Dr Debelle also addressed the fact that proportion of borrowers falling behind on Australian mortgages had edged to a decade high, a trend he said was partly due to lending standards that have since been tightened.

Dr Debelle said national arrears were at a sustainably low 1.0 per cent against a backdrop of weaker economic conditions and rising unemployment in some areas.

WA and the NT have been affected more than other regions, though Dr Debelle was hopeful tighter lending standards and low interest rates would help keep a lid on the national figure.

"When we control for the age of loans and the state of the economy, we find that the more recent cohorts have lower arrears rates than earlier cohorts," Dr Debelle said.

Specifically, he said loans that originated in the past two years have an arrears rate that is almost 40 basis points lower than loans originated prior to 2014.

"The lower arrears rates for more recent loans suggests these tighter lending standards have been effective," Dr Debelle said, adding that the arrears rate in Australia was low by both historical and international standards and posed little risk to local lenders.

Arrears in the US peaked at around 10 per cent in the financial crisis.

In all states and territories, increases in the share of housing loans that are 90 or more days in arrears have been mainly driven by borrowers falling behind for longer rather than by more borrowers falling behind.

Dr Debelle said this suggests households are finding it harder to resolve their situation than previously and is consistent with the softer housing market conditions.

Dr Debelle said three interest rate cuts since June to a record low 0.75 per cent would also ease pressure on indebted households while supporting employment growth and the housing market.