Rates could drop under Medicare levy

The Gillard government has confirmed workers will face a tax increase through the Medicare levy to fund the National Disability Insurance Scheme

The RBA could cut interest rates if the Medicare levy rises. Source: AP

The RBA could cut interest rates if the Medicare levy rises. Source: AP

ECONOMISTS and tax specialists have warned the RBA may have to cut rates to offset the impact of a Medicare levy hike and that governments may adopt levies to fund future promises.

University of NSW taxation professor Neil Warren said Australia had a history of levies and the latest proposed hike could set a precedent.

''We have a long history of this from a milk levy, a sugar levy, levies on guns, a flood levy,'' he said.

''What is different is this goes on forever, we get a little concerned about this because the history tells us from an economics point of view they have such good political consumption, people go 'oh well, it is going to a good cause', governments tend to over use them.''

He said the Medicare levy already only funded a fraction of the nation's medical costs.

AMP chief economist Shane Oliver said the levy proposal was a lesson that proposals such as the NDIS needed to be funded somehow and it was a ''community judgment'' that DisabilityCare was needed.

''If you want something you have got to pay for it. It is a community judgment if we want the NDIS, we have got to pay for it,'' he said.

He said the levy rise was an effective income tax hike at a time when the economy was sluggish.

For a person earning $100,000 with a $250,000 he said the hit was the equivalent of a 0.25 per cent rate hike and the impact on household spending could prompt the RBA to drop rates.

Mr Oliver said hopes household spending would rise to stem the affects of the slowing mining boom could be ''jeopardised to some degree''.

University of Technology tax lecturer Adrian Raftery said raising the Medicare levy from 1.5 to 2 per cent to cover the National Disability Insurance Scheme could set a precedent.

''What is going to happen in five years time or ten years time when you have five new policies are you going to continue to put half a per cent on the Medicare levy?'' he said.

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RBA ready to cut rates, hopes not to

RBA governor Glenn Stevens. Source: Supplied

THE Reserve Bank of Australia is ready to push interest rates lower if that's what the economy needs.

But the consensus at the central bank appears to be that there's a very good chance that the economy might be able to get by without it.

The key sentence from the minutes of the RBA's monthly board meeting on April 2, released on Tuesday, was a near word-for-word repeat from all post-meeting announcements and minutes this year.

"The outlook for inflation, as currently assessed, would provide scope for further easing should that be necessary to support demand," the RBA said in the minutes.

The background to that "leave-the-door-open" stance is an economy that grew below its normal pace through most of 2012 and is expected by the RBA to do that again in 2013 before return to "trend".

But the pluses and minuses are still set for a tense struggle over the coming year or so.

"Overall, recent data suggested that interest-sensitive parts of the economy were responding to the historically low levels of rates and it remained likely that this had further to run," the RBA said.

"At the same time, the factors weighing on the economy - including the high exchange rate, the waning growth of mining investment, and fiscal consolidation - were likely to persist.

"The key issues were what the balance of these factors would turn out to be."

By keeping the cash rate steady since its last cut to three per cent in December, and by the wording of its announcements since, the RBA has made it clear that it has strong hopes that the economy can "rebalance", as some economists put it, without further monetary stimulus.

And there's no doubt the RBA would dearly like to avoid more rate cuts, and the risk of asset market distortions - like housing price booms - they bring.

If the economy fails to show continued signs that it is on track for a return to trend growth, then rates will come down and the RBA will not hesitate if that time comes.

But there's no sign right now that the RBA is in any hurry to get down off the fence.

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Fixed rates fall to all-time low

It pays to shop around for a home loan. Source: Supplied

FIXED interest rates have fallen to an all-time low - but most home loan customers are failing to take advantage.

Some financial institutions are offering three-year fixed rates below five per cent and experts believe they will not fall any lower.

By comparison, major lenders' standard variable rates are still averaging more than 5.7 per cent, even after the typical 0.7 per cent discount.

Yet the latest data from the Australian Bureau of Statistics shows only 12 per cent of customers who took out mortgages this year have fixed their loans, compared to more than 20 per cent who locked in a rate above 8 per cent in 2007 in the run-up to the global financial crisis.

Those currently on a variable interest rate are, in effect, betting it will not only fall lower than fixed offers - but that it will continue to fall.

For example, if in the next 18 months their variable rate was cut by 0.25 per cent three times to less than 5 per cent, there would still need to be three further cuts in the subsequent year and a half to make up for the additional interest costs incurred in the first 18 months.

This calculation does not take into fees. While some economists are forecasting further official rate cuts, HSBC economist Paul Bloxham said it was unlikely the Reserve Bank of Australia would reduce borrowing costs further  the cash rate has remained at 3 per cent since December.

"In our view we don't think the RBA is going to cut the cash rate any further so you would think it is not an unreasonable time to be considering potential fixing," he said.

"Fixed rates certainly look very competitive at the moment relative to history."

If the average discounted variable rate remained unchanged, a household which had $300,000 would pay nearly $8000 more in interest over three years than a family that fixed at 4.99 per cent. Again, this calculation does not take into account fees.

ABS figures showed after the GFC customers steered away from fixed loans with just 5 per cent of new customers locking in rates in both 2009 and 2010.

But in recent years the numbers have slightly increased, 8 per cent of customers locked in rates in 2011 while 13 per cent locked in their loans in 2012.

1300HomeLoan managing director John Kolenda said it's unlikely fixed rates will dip further and borrowers should pounce.

"I think we're very close to bottom of the cycle with fixed rates," he said.

"There's certainly been some great pricing out there by some of the majors on fixed rates for two or three terms, we've seen anything from 4.79 per cent to 4.99 per cent, they are at all-time record lows.

"So there's all indications we're near the bottom of the rate cycle for fixed rates."

Mortgage Choice spokeswoman Belinda Williamson said they had seen as easing of customers fixing loans in the first quarter of 2013 compared to the March quarter last year.

The average percentage of fixed rate loans over the March quarter was 20.78 per cent of new loan approvals, she said.

This compared to 22.67 per cent during the same period in 2012.Ms Williamson said many customers could be holding off on fixing their loans in the hope rates would fall further.

Canstar analyst Mitchell Watson said a lower interest rate could save a home loan customers thousands of dollars across the term of their loan.

"Depending on the size of your mortgage, a one per cent difference in interest rate can equate to several thousand dollars variation in interest costs per annum," he said.

"Variable interest loans tend to be more popular in Australia but those who are currently shopping for a new mortgage might do well to consider locking in."

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Savers squeezed again by rates

Interest rates on term deposits continue to fall. Source: National Features

INTEREST rates on fixed deposits have been squeezed recently and longer-term savings are among the hardest hit.

Australian homeowners have welcomed plummeting rates but the same cannot be said for savers.

An analysis by comparison site Mozo has found the average rate on a 180-day term deposit this month is 3.89 per cent, compared with 5.45 per cent two years ago.

In March 2011, 12-month term deposits attracted an interest rate of 6.07 per cent compared with 4.03 per cent now, while two-year fixed deposits had an average rate of 5.97 per cent compared to 4.07 per cent now.

Mozo spokeswoman Kirsty Lamont says the battle for deposits has slowly eased.

"One and two-year rates in particular have fallen sharply and by more than the fall in the cash rate since March 2011," she says.

"The banks are not competing as hard for deposits as they were in 2011 and 2012."

However, ING Direct's executive director of customer, John Arnott, says the "savings habit has stuck".

"The average term deposit has slightly shortened to about eight months ... that's shortened from a month or two," he says.

"Customers out there are looking for certainty and also flexibility when their term deposits mature."

UBank general manager Alex Twigg says he has seen a 10 per cent growth in the amount of term deposit accounts since October, but he has seen the opposite customers opting for longer terms.

"The average length that people are taking TDs out has grown, currently the average length is over seven months," he says.

"They are moving away from the three to six month terms to six to 12 months."

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Labor pushes for penalty rates

THE Government wants to enshrine penalty rates in law in a major appeal to millions of workers which will clash with deregulation demands from employers.

Government legislation will insist that awards protect extra payments for working on weekends, public holidays and doing overtime.

Prime Minister Julia Gillard said the legislation would "insert a new modern awards objective in the Fair Work Act".

"We will ensure that penalty rates, overtime, shift work loading and public holiday pay are definite, formal considerations for the Fair Work Commission when it sets award rates and conditions,'' the Prime minister told a Canberra conference held by the ACTU.

"We will make it clear in law that there needs to be additional remuneration for employees who work shift work, unsocial, irregular, unpredictable hours or on weekends and public holidays."

Employers are certain to oppose the move and claim it will cost jobs. The Government will be told that the economy no longer works nine-to-five and there was no room for penalty payments.

But the Prime Minister's announcement received a round of applause at the conference on policies to help the estimated two million Australians without secure employment.

Ms Gillard said these people "don't know how many hours they'll work next week or next month - who can't save or plan to get ahead - whose opportunities in life are restricted and whose family's future is constrained".

They included cleaners, drivers, labourers, bar staff, wait staff who earned around 85 per cent of the average wage of Australians for the hours they work - $4 to $5 an hour less than most people.

The Government wants to focus on employment issues in the six months leading to the September 14 election, including what it says is the rorting of 457 visas used to bring in skilled labour at the expense of Australian job seekers.

"The widely held assumption that the typical person on a 457 visa is performing urgently needed work for economic expansion in remote Australia on a project where a tough combination of specialist skills and extreme conditions make labour impossible to come by is just not supported by the facts,'' said the Prime Minister.

"107,000 people work in Australia as temporary overseas workers. Indeed of those 107,000 people, barely one-sixth is employed in mining and resources.

"In fact, while the overall program has rapidly grown, new applications for temporary overseas work in mining have fallen nearly 17 per cent compared to the same period last year.

"And increasingly there is a shift in these workers from those with higher skills, degrees and advanced trades, to lower skills."

Unemployment stayed at 5.4 per cent last month with an extra 17,800 full-time jobs recorded by the Bureau of Statistics today.

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Big Four tipped to start rates war

AN unprecedented out-of-cycle interest rate cut may still be on the cards, even if the Reserve Bank keeps the official cash rate on hold, as expected, today.

News Limited's shadow Reserve Bank has voted to keep the cash rate on ice today, but three members think at least one major bank will slash its standard variable rate by five basis points anyway.

Research fellow at the Centre for Independent Studies, Stephen Kirchner, is tipping a five-basis point cut by one of the Big Four will spark a discounting war.

"I think there is scope for further out-of-cycle cuts in at least some lending rates, if not the standard variable rate," Dr Kirchner said.

However, any out-of-cycle cut would be taken into account when the Reserve Bank next came to consider cuts.

"This just lessens the prospects for cuts in the official rate," he said.

Fellow shadow board member and Airport Economist Tim Harcourt also expects an out-of-cycle cut. "If the RBA leaves rates unchanged, I think at least one of the Big Four banks will try to get first-mover advantage and cut mortgage rates by five basis points or so," he said.

Managing director of Market Economics, Stephen Koukoulas, has also argued lower funding costs will open the door to voluntary cuts.

Bank of America Merrill Lynch chief economist Saul Eslake said that at the very least, home borrowers could expect to pocket any further rate cut in full.

In addition, "the banks appear to have been more willing to 'discount' their mortgage rates in order to capturebusiness in recent months," Mr Eslake said.

A respected banking analyst with brokerage CSLA, Brian Johnson, said the chances of an out-of-cycle cut this month were "low" given higher payouts on term deposits and a likely rise in short-term wholesale funding costs if it became apparent the Reserve's rate cutting cycle was over. "The most favourable dynamic right now is that the 90-day bank bill, which most bank funding is swapped to, is below the Reserve Bank's 3 per cent cash rate. That's extremely favourable now but it could reverse in a heart beat".

However, politics could come into play. "I think it's highly unlikely in an election year that you'll see net interest margins expand." So if funding costs began to ease significantly, out of cycle rate cuts could be on the cards. "If things do really improve, we should expect banks to pass that on to consumers."

A spokeswoman for loan comparison website Rate City, Michelle Hutchison, said an out-of-cycle interest rate cut was "more likely than not" and would come after four small lenders cut their rates voluntarily last week. "We have never seen variable home loan rates fall out of cycle. We have seen them increase but we haven't seen them drop," she said.

The Shadow RBA is split on the future for the official cash rate.

Two members, HSBC Australia's chief economist Paul Bloxham and Eureka Report's Adam Carr, are tipping rate hikes within the year.

According to Mr Carr: "Things globallyaren't anywhere nears as bad as the Reserve Bank board had thought and so I think they'll be hard pressed tojustifyfurthercuts."

Mr Bloxham said there had been was more evidence of recovery in the non-mining parts of the economy. "This month brought further signs that already low interest rates are getting some traction: consumer sentiment bounced, the housing market improved and the Australian share market rose to a new four and a half year high."

However, the majority of the board five out of nine expect further rate cuts this year will be needed to ensure a smooth transition after the end of the mining investment boom.

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RBA's high dollar a factor in cutting rates

Make: CanonModel: Canon EOS-1D Mark IIIDate/Time: 2008:05:06 13:31:30

THE Reserve Bank is keeping an active watch on the strength of the Australian dollar when setting interest rates.

RBA governor Glenn Stevens today told a parliamentary committee the exchange rate was still higher than would be expected considering the official cash rate is at record low of 3 per cent.

Future rate cuts remain under active consideration, he said as the economy is likely to grow a little bit below the level of 2012.

But Mr Stevens was upbeat the rate cutting cycle that has seen official rates drop by 1.75 per cent since November 2011 was having an "effect'' and the property market was showing signs of recovery.

"Housing prices have been rising since last May, having declined for a period prior to that,'' he said. "Share prices have also risen quite significantly and, if anything, by a little more than in comparable markets overseas."

"The returns available to savers on safe assets like bonds and bank deposits have fallen by enough to prompt Australian savers to consider shifting their portfolios towards other assets.

"These are channels of monetary policy at work,'' Mr Stevens said.

He also said the high level of household savings was a good thing and more normal than the pre-GFC period when household debts outstripped savings levels.

"Households do not feel the same ebullience they did for some years prior to the financial crisis in major countries. But that degree of confidence, with its associated patterns of saving and increasing leverage, was unusual, and is not likely to recur,'' he said.

The RBA governor also admitted that while the eurozone has avoided catastrophe it is still faces immense challenges that could derail the global outlook.

But Mr Stevens was upbeat the US economy was on the road to recovery and was as likely to surprise on the upside as it was to shock on the downside over the coming 12 months.

Meanwhile, the RBA said the mining investment boom is close to its peak.

Mr Stevens said he expected investment in the mining sector to peak soon, though it would remain at elevated levels for some time.

"Looking ahead, it appears that the peak in the level of resource sector investment is now close," he said. "It is a very high peak, but we do not think that there will be a rapid decline in the near term after the peak."

Mr Stevens said investment spending in other parts of the economy remained subdued but would strengthen following the peak in the mining sector.

"Investment spending by businesses in other sectors has thus far remained somewhat subdued in comparison," he said. "There are good reasons to expect it will strengthen in due course, but the available indicators at present do not suggest that is going to happen in the very near term."

With AAP.

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Hourly pay rates up in December quarter

TOTAL hourly rates of pay, excluding bonuses, rose by a seasonally adjusted 0.8 per cent in the December quarter, official figures show.

The wage price index rose 3.4 per cent from a year earlier, the Australian Bureau of Statistics said on Wednesday.

The median market forecast was for a rise of 0.8 per cent in the December quarter.

In the September quarter, the index rose an unrevised 0.7 per cent.

The index measures movement in underlying wages by calculating the change in wage and salary cost across a range of occupations.

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