If banks offer a fixed rate lower than the variable rate, is that an indication interest rates may head down?

Question

This is one of the major banks in Australia: http://www.anz.com/aus/RateFee/InterestRates/Rates.asp

At present time, the variable rate is 7.80% but the fixed rate is 6.99% for one year.

And it seems most banks in Australia, if you fix the rate (at the moment), you will get a lower rate.

Is this an indication that in the eyes of the banks, that they believe the interest rates are going to down? I just ask because it seems most people in the media think the rates are going up and they've risen about 6 times in a row now.

Could it be that the banks are secretly preparing for rates to drop?

Answer 1

This is known as an inverted yield curve. It is rare, and can be caused by a few things, as discussed at the link. It can be because the view is that the economy will slow and therefore interest rates will go down. It is not caused by "secret" preparation. It could also be that there is generally in the world a move towards safer investments, making their interest rates cheaper.

If I had to guess (and this guess is worth what you paid for it) it is because Australia's interest rate is significantly greater than other parts of the world, long term lower risk investment is being attracted there, as it gets a better return than elsewhere. This is pushing rates lower on long term bonds.

So I would not take it as an indication of a soon-to-be economic downturn simply because in this global economy Australia is different in ways that influence investment and move interest rates.

Answer 2

Usually that is the case that when fixed rates are lower than the variable rates, it is an indication that the banks feel the next movement in rates could be down.

You also need to look at the fixed rates for different periods, for example 1 year fixed compared to 3 year fixed and 5 year fixed rates. If you find the 3 and 5 year fixed rates are higher than the 1 year fixed rates this could be an indication that the banks feel rates will fall in the short term but the falls won't last long and will continue to rise after a year or so. If the 3 year fixed rates are also low in comparison, then the banks may feel that the economy is heading for a longer term down trend. The banks won't want to lose out, so will change their fixed rates on their perception of where they feel the economy is headed.

Since your post in May 2011, the standard variable rate has since dropped twice (in November and December) to be at 7.30%. You will also find that fixed rates have also been dropped further by the banks, indicating additional future cuts in the variable rates.

Regards,

Victor