RBA cuts the cash rate to a new historic low [video]

At its May meeting the RBA decided to lower the cash rate by 0.25% to 1.75%.

Fear of a job-destroying deflation has forced the Reserve Bank’s hand, risking another politically charged spike in house prices and bounce in household debt.

Of course it will be interesting to see if the banks pass this on in full.

Int he meantime…watch Martin Lakos, Division Director, Macquarie Private Wealth, discuss the RBA’s decision.

Macquarie comment:

Domestic economic data is showing the Australian economy to be stable with patches of improvement, but the strengthening currency may have been a key driver.

Australian economy growingAustralia Economy Concept
The Australian economy is growing at 3%, driven by improving household consumption, population growth and resource and services sector exports.

Unemployment fell to 5.7% in the last month, reflecting improving demand for labour, in particular by the various services sectors.

• Business conditions improving
The NAB business survey for the first quarter of the year shows business conditions improving, along with expectations, however confidence and investment is still lagging.

• Strong Australian dollar
A key catalyst to this cut is that the much needed depreciation in the Australian dollar has stalled. Our currency has appreciated by almost 7% against the US dollar since the beginning of this year.

Macquarie’s economist believes if the Australian dollar remains elevated for a sustainable time, the RBA may cut rates in August to 1.5% probably the low point in this interest rate cycle.

Rate City comment:

The average variable home loan rate is set to drop to 4.40 per cent this month, following today’s decision by the Reserve Bank to cut official rates to a new record low of 1.75 per cent.

At that rate, repaying the average, $300,000, 30-year home loan costs less than $50 per day.fha-loan-requirements

Sally Tindall, money editor at RateCity.com.au, said home loans just got a lot more affordable for some.

“At less than $50 a day, the great Australian dream of homeownership will now be a lot closer to reality for some,” she said.

“For anyone who’s already got a variable mortgage, today’s rate cut could save you around $45 a month – or over $500 a year – on the typical $300,000 home loan.

“That’s a handy chunk of savings you can put into your weekly budget or, better yet, put back into your home loan.”

But with increased global volatility putting the squeeze on banks’ wholesale funding costs, there’s every chance lenders will opt to keep some of the cut for themselves, according to Tindall.

“We know a lot of lenders are under wholesale funding cost pressures so they might decide to keep some of the rate cut for themselves,” she said. save-money-house

“Call your bank, find out what they intend to do, but also see what others are offering, because ultimately the lower the comparison rate,
the more money you’ll have left in your pocket.

“There are plenty of lenders already offering rates below 4 per cent for owner-occupiers, so if you’re on a rate above 4.50 per cent, the chances are you’ll still be behind, even if you do get a cut.”

Before today’s cut is factored in RateCity.com.au shows variable rates from 3.54 per cent, and 1 year fixed rates from 3.50 per cent.

Impact of a 0.25 percentage point rate cut

Average home loan size

Monthly repayment before May 2016 cut*

Monthly repayment  after May 2016 cut*

Monthly  saving after May 2016 cut*

Total annual repayment with no cuts

Total annual repayment after May 2016 cut*

Total savings over a year if rates cut


$        1,546.91

 $               1,502.28

 $             44.63

 $      18,562.92

 $    18,027.36

 $              535.56


$        2,578.18

 $               2,503.80

 $             74.38

 $      30,938.16

 $    30,045.60

 $              892.56


$        3,867.28

 $               3,755.71

 $           111.57

 $      46,407.36

 $    45,068.52

 $           1,338.84

$1 million

$        5,156.37

 $               5,007.61

 $           148.76

 $      61,876.44

 $    60,091.32

 $           1,785.12

Tim Lawless, CoreLogic Director of Research comments on today’s result.

The RBA decision to cut the cash rate to a new historic low today of 1.75% was likely to be hotly debated at the board meeting held today.

On one hand we have economic growth tracking at 3% per annum, a housing market where the pace of capital gains is moderating in a controlled fashion and relatively strong labour market conditions. 

Balance this with negative quarterly inflation and a high Australian dollar and it becomes clear that this decision probably could have gone either way.

The big question relevant to the housing market is how much of the lower cash rate will be passed on to mortgage rates.

The spread between the cash rate and standard discounted mortgage rate has been widening since 2008 when there was 1.8 percentage points difference between the two rates.

By the April 2016 the spread has doubled to be 3.65 percentage points and is likely to widen further if the full rate cut isn’t passed on by lenders to mortgage rates.

With home values still showing some upwards momentum, lower mortgage rates are likely to provide some further stimulus to the housing market, which the Reserve Bank will be monitoring closely.

The last thing they would like to see is a rebound in the rate of capital gain, particularly in Sydney and Melbourne where dwelling values have already risen 50% and 31% respectively since the rate cutting cycle began in November 2011.

Also published on Medium.

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Michael is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He's been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au

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