Draghi Cuts Mortgages 17,000 Kilometers Away: Australia Credit

European Central Bank President Mario Draghi’s shift toward quantitative easing is reverberating 17,000 kilometers (10,500 miles) away in lower Australian mortgage rates.

Draghi’s Aug. 22 comment that he will “use all the available instruments” to stabilize prices added to an already benign interest-rate environment that sent relative yields on Australian financial debt to seven-year lows. That’s helping banks trim mortgage rates, providing the Reserve Bank of Australia with a de facto easing even as investors bet it will keep policy unchanged tomorrow for a 13th month.

Lower home-loan rates are putting more cash in consumers’ pockets, aiding RBA Governor Glenn Stevens’s efforts to rebalance growth toward domestic demand as mining investment wanes. The spread between financial debt and government notes touched 102 basis points in July, the narrowest since October 2007, Bank of America Merrill Lynch data show. The gap averaged six basis points less than for U.S. banks in the past year.

“The likely action from the ECB will add to a very low interest-rate environment globally,” said Susan Buckley, Brisbane-based managing director for global liquid strategies at QIC Ltd., which oversees about A$70 billion ($65.4 billion). “You’ve got another major central bank potentially buying paper in the market, so that’s going to help bank funding generally speaking globally and that flows through to Australia.”

Real Rates

Traders are pricing in 7 basis points of reduction in the cash rate over the next 12 months, according to swaps data compiled by Credit Suisse Group AG. All 31 economists surveyed by Bloomberg expect the central bank to keep the rate unchanged at 2.5 percent when its board meets in Adelaide tomorrow. QIC predicts a rate increase in the third quarter of 2015.

Stevens focuses on household payments when assessing policy implications on the economy. Since the RBA last lowered the cash rate target in August 2013, five-year fixed rates offered by Australia’s four major banks have fallen as much as 70 basis points, according to home-loan broker Mortgage Choice Ltd.

“The average interest rate on housing loans is now around 15 basis points lower than it was after the reduction in the cash rate target in August 2013,” the RBA said in its quarterly statement on monetary policy last month. “Competition for lending remains strong, with interest rate discounting and broker commissions increasing over the past year.”

Mortgage Growth

Low rates have spurred home prices and boosted residential construction, which the central bank predicts will help fill a gap in growth and soak up some of the excess labor of former mine workers.

Central bank data released three days ago showed mortgage lending to investors in the 12 months ended July surged 8.9 percent, the fastest pace since May 2008. Home prices across Australia’s state and territory capitals recorded the biggest winter gain since 2007, according to the RP Data-Rismark Home Value Index. Prices advanced 4.2 percent in the three months through August, it said today.

Private reports today also showed a gauge of inflation slowed to 2.5 percent in August from a year earlier compared with 2.6 percent in July, and an index of manufacturing dropped to 47.3 last month. Fifty is the dividing line between expansion and contraction.

While the central bank’s 2.25 percentage point cash rate reduction from late 2011 to August 2013 has spurred property prices, companies have been slower to respond.

Animal Spirits

Stevens, in semi-annual testimony last month said business needs to release its “animal spirits” and opt for investment over dividends. He said monetary policy couldn’t trigger the confidence and preparedness to take a risk. “I’ve allowed the horse to come to the water of cheaper funding. I can’t make it drink,” he said Aug. 20. The RBA on Aug. 8 cut its economic growth and inflation forecasts through mid-2015.

Australian company profits fell 6.9 percent in the second quarter from the first three months of the year, led by a 15.2 percent drop at mining companies, statistics bureau data showed today. Inventories, which feed into the gross domestic product figure to be released Sept. 3, rose a greater-than-expected 0.8 percent over the period.

The key impediment to Stevens’s plan for a shift in the drivers of growth is the Australian dollar, the best performing group-of-10 currency this year. It has defied a 35 percent drop in the price of iron ore, Australia’s biggest export.

Adjustment Mechanism

“Instead of the adjustment to the end of the mining boom coming from a lower Australian dollar, it is occurring through falling real wages and a rising unemployment rate,” said Paul Bloxham, chief Australia economist at HSBC Holdings Plc in Sydney, who put back his call for a rate increase to the second quarter of 2015. “Low interest rates are also largely doing their job, supporting housing prices and dwelling construction. But, in the face of falling commodity prices, the high Australian dollar has acted as a drag.”

The jobless rate jumped to a 12-year high of 6.4 percent in July from 6 percent in June, and the central bank said Aug. 8 unemployment is unlikely to fall in a sustained way before 2016.

The currency probably slowed the economy last quarter, with analysts predicting growth decelerated to 0.4 percent from the first three months of the year, when it increased 1.1 percent. The economy of Australia’s biggest trading partner, China, will probably grow this year at the weakest pace since 1990, a Bloomberg survey showed.

China’s manufacturing expanded at a slower pace last month, data released today showed, joining weaker-than-anticipated credit, production and investment data in suggesting the economy is losing momentum.

“The outlook for iron ore and coal prices is a source of uncertainty for the domestic economy,” the RBA said Aug. 8. “As is typical, there is a wide range of forecasts by market analysts for these commodity prices, with bank estimates towards the lower end.”

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