Interesting - thank you for sharing. I usually don't shy away from any asking for any macro interpretations, especially when it comes to developments in international credit markets
1. Banks main funding source is via deposits - around 50% and has been rising since the GFC (I suspect it has fallen back slowly since then). The cost of deposits change depending on maturity dates/liquidity of those funds. For example, transaction accounts don't pay interest, while term deposits get to around 4%. The costs of deposits have fallen significantly over the last year/two, 5+ basis points.
2. Banks reducing their fixed rates is a function of a fall in the COST OF FUNDS. It is NOT an expectation value of market interest rates over a 3-5 year period. This is a common misconception, and one the author of the article misunderstands. Anecdotally, as part of my previous role, I met with the BIG 4 + other chief forecasters (Oster, Evans, Richardson, etc) for the last 3 years - all have publically stated forecasts on interest rates - and none would have them FALLING significantly over the medium run. Evans WAS the most dovish, and he has shifted stance to IR increases in medium run.
3. Also, his assumption on market pricing of rate cuts is wrong I believe. I haven't checked latest info, but its available on Bloomberg daily and I'm quite confident in saying the market hasn't factored in 50bp cut over then next 12 months.
4. The RBA's concerns over the dollar do exist. But their ability to control/manipulate it is drastically overstated, largely as a result of misunderstandings from most Australians. People see the dollar and assume its some glorious reflection of the current state of the economy, forgetting that day to day, it is largely driven by relativities in interest rate differentials around the world - ALL outside our control. Sure, over the medium run it'll adjust to fundamentals (e.g. last May's 15% fall), but day to day, a much larger driver in movement is IR differentials.
5. His right about falls in swap rates. Price of credit in wholesale funding markets has fallen. This has started to feed through in the price of fixed rates. Others have commented on whats likely to happen. Note that this makes up a smaller portion of the COST OF FUNDS for banks, but is more directly related to fixed rates. This is because of maturity differences - deposits are generally more liquid, meaning theyre likely to underpin shorter term rates. Longer term rates sourced via international credit markets
6. Fixed rates are becoming a lot more popular in Australia. His static figure doesn't take into account that a few years back the numbers were sub 10%. Getting up to 20% is a very significant shift.
Haha that's all for now. As I said, love this stuff!
It is nonetheless, a very interesting article that generally does have the right idea.
Not sure how good this guy is with his predictions but it makes for interesting reading
http://knowledgesource.com.au/what-do-the-banks-know-that-we-dont/#fromemail
If he's right, interest rates will drop further. Increases are unlikely as it will bring the Aus dollar up and this is not what the RBA wants.
Perhaps someone with a better understanding of macroeconomics can tell me if what he's saying is on the money?