Since mid 2008, when the Reserve Bank (RBA) realised it’d made a horrible mistake in targeting now non existent inflation, interest rates have fallen rapidly.

While this is bad news for those who fixed their homeloans 12 months ago (and unfortunately many did), the question now facing the 75% of borrowers paying variable interest is when to fix some or all of their mortgage.

Any look at Australian mortgage rate history over the past 20 years suggests that whenever borrowing rates go below 6%pa, the bottom is not far away. Of course, since the RBA lopped 100bps from the official rate in early February, many mortgage holders are now paying interest well below 5.5%pa. Despite this, there are a few factors which suggest Australian rates have further to fall.

First, the global economy is slowing more rapidly than most pundits predicted as recently as three months ago. The US and UK are now in recession, Western Europe is not far behind and even mighty China is experiencing a dramatic slowdown in output. Australia’s economy will not remain immune from the fate being suffered by others, and rate cutting will be an appropriate part of any future stimulatory package.

Second, other central banks around the globe have already cut their rates to unprecedented levels; in fact, the UK’s official rate of just 1% has no precedent in the Bank of England’s 316 year history. Given Australia’s official rate remains relatively high at 3.25%, it still has plenty of room to fall further.

Finally, local unemployment will almost certainly rise during the next 12 to 18 months, from its current level of just 4.5% (an historic low for the past 35 years) to at least 7.5%. This means around 350,000 people will lose their jobs, placing the economic credentials of the Federal Labor Government under immense pressure. Although the RBA is notionally independent from government, it’d be naive to think the PM and Treasurer won’t exert considerable pressure on the Bank to reduce the financial pressure on struggling households.

While these factors all suggest that mortgage rates could well go below 5%, I suspect that when this occurs the time to fix will be at hand. The Commonwealth Bank has already warned borrowers that any future rate cuts are unlikely to be passed on in full to customers (due to the competing and presumably superior interests of its shareholders). And the deflationary pressure under which the global economy is reeling will not last forever, especially when governments resort to switching on the money printing presses (which has already started) after all other economic remedies fail.