We’ve started 2021 with rates lower than anyone would have predicted this time last year. The question now is will they continue to trend even lower on the back of further intervention from the Reserve Bank? Or could rates stabilise on the back of the team of five million continuing to keep the virus out, and the potential green shoots of the positivity of the Covid-19 vaccine?

December saw the Reserve Bank roll out its Funding for Lending Programme (FLP) which offers eligible banks the ability to borrow directly from them at the official cash rate. Over the last couple of weeks, we have seen this have an immediate effect on the short-term rates, with competition focused around the oneyear rate in particular.

The large banks Westpac and ANZ at the time of writing had announced moves for this rate term to a new low for them of 2.29%. There may still be further drops for this term with some economists predicting a further reduction of the OCR, such as ANZ who foresee it decreasing by a further 15 basis points (0.15) in May.

Not Going Negative

On the flipside of this, there is no longer the strong expectation that we will see the cash rate go negative this year. The banks had to have their internal systems sorted to allow this by December last year but with the economy and employment proving more resilient than expected we may be close to the low point of where the cash rate goes.

Several bank economists have now said they don’t see this being required with inflation proving stronger than expected. The housing market continuing to boom
will also continue to prop inflation up, thereby reducing the need for further reductions.

There is now also upward pressure on longer-term rates connected to expectations around increased government spending over in the United States, which will add a challenge to borrowers to pick the best rate or potential mix to suit their needs.

Non-Bank Offering

Another interest rate point which is likely to get more focus this year is the nonbank space, with the reimplementation of the loan-to-value restrictions around investment properties. While the Reserve Bank gave banks until March to reintroduce these, every bank has already done this with ANZ going one step further and requiring 40% deposit. Some non-bank lenders in this space are exempt from these rules, thus still only require a 20% deposit for investment purchases.

Therefore, it is likely there will be more borrowing through these lenders. This will happen especially if more banks decide to follow the decision from ANZ or if the Reserve Bank decides to regulate further and increase the deposit requirement to 40% like we saw in August 2016. While the rates are higher than what the banks are offering, they are still lower in most cases than what was available at a bank level only 12 months ago.