Why are car loan interest rates so low in Australia?

Why are car loan interest rates so low in Australia?

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Record low wage growth, high home prices, low consumer spending, falling household savings, an unwillingness of consumers to take on more household debt when they are already heavily invested in housing all contribute to the record 20-month freeze on the Reserve Bank Cash Rate as of April 2018.

Economists are divided on whether the RBA should raise interest rates in Australia, but Reserve Bank of Australia governor Philip Lowe is expected to keep RBA interest rates on hold for most of 2018.

So why the holdup?

Wages growth in Australia is stagnant, and until wages rise and flow through to faster inflation, the interest rate will hold steady at 1.5 per cent.

One reason for the slow wage growth is unemployment, which is very slowly decreasing. As job numbers rise to achieve full employment, a jobless rate of around 5 per cent, it is expected that businesses will be forced to pay employees more to hold existing staff and attract new workers.

This could be a slower process than first anticipated, with full employment in the US and UK still not resulting in faster wage growth.

What's 'normal' for interest rates in Australia?

Throughout 1990-2016 the RBA changed the cash rate on average once every five months. Looking at the trends since 1960, the interest rate has tended to rise sharply before gradually falling over a longer period of time, so that the rate spends much more time falling than going up.

Interest rate rises have been associated with strong economic growth and rising inflation. The mining boom is an example of this, with mining investment increasing from 2 per cent to peak at 8.5 per cent of GDP. Interest rates responded by climbing steadily through the mid-2000s.

Australia's monetary policy is focused on helping economic growth to improve. History shows that while it doesn't take many rate rises to hit an economic break, it's much harder for interest rate cuts to stimulate and encourage economic growth.

Our GDP growth is expected to be 3 per cent in 2018-19, up from 2.75 per cent in 2017-18, however, this is mostly due to population growth.

How does Australia fit into the global economy?

Australia wasn't hit as hard as other countries like the US by the 2009 recession, and with a floating exchange rate, the country isn't obliged to remain in line with changes in overseas markets.

As such, Australia is free to act independently to meet its own goals. This means keeping inflation at a rate of 2-3 per cent, the 'sweet spot' for a healthy economy. There's no particular urgency to respond by tightening the economy and increase RBA interest rates in 2018, which is why Australia's adopting a 'slow and steady' approach to economic growth.

That said, Australian economists are still keeping a close eye on the global economy, especially China's economy and the effects of US tax policy.

Factors that determine interest rates in Australia

Inflation is one key determinant of interest rates. Market economists aren't expecting any major change in current inflation in the near future.

Another indicator is the housing market. In Australia, the housing market has plateaued over the last year, with fewer properties being sold at auction and low or negative growth in housing finance.

What's the outlook for the near future of Australia's economy?

Business conditions are a key indicator of RBA monitors, and there are indications of positive expansion. Non-mining companies are beginning to spend more, and they are hiring more employees too. In 2017, 400,000 new jobs were created, and 75 per cent of these were full-time positions.

Government spending is expected to increase throughout 2018 as well.

This optimism is evident in Philip Lowe's recent statement to an audience in Perth:

'It's more likely that the next move in the cash rate will be up, not down, reflecting improvement in the economy'.

It's been more than seven years since the last interest rate rise, so if and when this happens it will shock some.

What does this mean for car loans?

Banks have been raising interest rates out of cycle with the RBA to cope with the increasing costs of overseas funding.

This means that car loan rates could rise if there's a rise in RBA interest rates in 2018, but this is still a little way off. For now, you can still access record low car loan rates.

Almost all car loans have a fixed rate for the duration of the loan term, so when you lock in a good car loan rate, you are secure that you won't pay any more for your loan.

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