Photographer: Brendon Thorne/Bloomberg

Pimco Sees Aussie Mortgage Rates Rising as Rules Squeeze Banks

  • RBA benchmark capped at 2% in 2016, easing bias stays: Pimco
  • Fund manager sees evidence of rebalancing not recessing

Australian borrowers will probably face higher interest rates next year as lenders pass on the expense of meeting new regulations, adding to the headwinds for a sluggish economy, according to Pacific Investment Management Co.

Home-owners have already seen mortgage payments increase this year after the nation’s four largest banks added 17.5 basis points on average to their variable rates, citing the cost of holding more capital. Pimco, with about $1.5 trillion in assets under management worldwide, expects that margin pressure to help ensure the Reserve Bank of Australia doesn’t raise its benchmark rate from a record-low 2 percent, according to the fund manager’s 2016 outlook for Australia released on Tuesday in Sydney.

“Even if the cost of capital is steady, the shift in the funding mix as banks attempt to meet the new capital targets will put some additional pressure on bank margins, which will most likely be passed on to borrowers,” said Rob Mead, the Sydney-based head of portfolio management for Pimco in Australia. “This ongoing bank margin pressure is likely to place a firm cap on the 2 percent RBA policy rate in 2016.”

Recession-Free Run

Policy makers in Australia are attempting to navigate the end of a record mining boom while extending to 25 years the economy’s recession-free run. Their efforts have been complicated by a nearly 50 percent drop this year in prices of the nation’s chief export iron ore and a slowdown in China, its biggest trading partner. The commodities slump has weakened government revenues with economists forecasting Treasurer Scott Morrison will flag on Tuesday a further A$3 billion ($2.2 billion) deterioration in the current budget. 

The RBA cut its benchmark rate twice this year to spur domestic activity outside mining, and Governor Glenn Stevens said this month the inflation outlook “may afford scope for further easing of policy.”

Traders are pricing about a 40 percent chance the RBA will lower its cash rate over the next 12 months, swaps data show.

The central bank will probably maintain an easing bias, given stresses in the economy, Mead said. He expects that the shift of growth from mining to the housing sector has already peaked and that will limit its ability to contribute to economic activity in the future.

Sluggish Economy

Adam Bowe, a Sydney-based portfolio manager for Pimco, said that domestic demand will be sluggish next year and the economy will be dragged back by reduced mining investment, slower growth in China and lower commodity prices.

“However, over the next six to 12 months, we see plenty of evidence that the economy will be rebalancing rather than recessing, and that continues to be our baseline forecast for 2016,” he said. For the RBA, “outside a recession, they are unlikely to significantly lower the cash rate.” 

Pimco said it was “constructive” on credit, particularly subordinated bank securities.

“The pricing of new issuance in the domestic Australian market more recently is reaching fair value territory,” Bowe said. The fund manager is also looking to profit from dislocations in global currency and swap markets, he said.

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