The Reserve Bank of Australia met expectations today and cut the official cash rate to another historic low.
The RBA board today chose to trim the cash rate to 1.50%, citing low inflation and a moderating housing market, according to one of Australia’s biggest comparison websites, finder.com.au.
To better understand their thinking behind this and the future direction of interest rates, here are 4 experts views:
Martin Lakos ( Macquarie) comment:
The Reserve Bank Board met on 2 August and cut the official interest rate by 0.25% to 1.5%.
This decision had been widely anticipated, as expectations of declining inflation for the June quarter were realised with the data released in late July.
The next RBA board meeting will be held on Tuesday 6 September
Tim Lawless (Corelogic) comments:
A slowdown in dwelling value growth may have made it easier for the RBA to cut the cash rate for the second time this year, however the primary reason for rates moving lower was likely to be the low inflation reading over the June quarter and the stubborn strength of the Aussie dollar.
CoreLogic’s hedonic home value index reported a 6.1% annual rise in capital city dwelling values over the year ending July, which is the lowest rate of annual growth since September 2013 and substantially lower than a year ago when dwelling values were rising at almost double the pace.
The annual trend of growth in Sydney has more than halved over the past 12 months, falling from 18.4% in July last year to 9.1% over the past twelve months.
Presuming the cash rate cut is passed on to mortgage rates, there is likely to be a renewed level of scrutiny on the housing market, with policy makers wary of a reversal in the slowing housing market growth trend.
The latest interest decision is likely to keep a base level of demand across the housing market, however other factors such as affordability constraints, higher supply levels, tighter lending conditions and weak rental markets are likely to see growth conditions continue moderating back to more sustainable levels.
Eliza Owen (Residex) comments:
The Reserve Bank of Australia has announced it will cut the official cash rate by 25 basis points in August, to a historically low 1.50%.
The decision comes off the back of the weak growth in the United States reported last Friday, extremely low inflation in Australia and a perceived stabilising in the Melbourne and Sydney property markets.
Economic data coming out of the US shows much slower than expected GDP growth in June. Annual GDP growth in the US economy was just 1.2% in June, which is well below its forecast of 2.6%.
The weakened confidence in the US economy has cast doubt on future cash rate increases by the US Federal Reserve and subsequently the USD fell sharply.
Every time the USD goes down the AUD goes up. The inverted relationship is demonstrated in Graph 1.
Graph 1: Movement in the AUD vs USD
Source: RBA & Trading Economics
In the past, the RBA has referenced a high AUD as being threatening to prosperity in exports and potentially stunting GDP growth more widely.
With inflation at just 1% in the year to June, there is also an added incentive to keep the currency down so overseas goods become more expensive and create ‘imported inflation’.
Monetary policy is increasingly being used as a tool to lower the AUD.
If the interest rate (or return on the dollar) is low, investors are likely to sell off the Australian dollar creating an oversupply of the currency – thus devaluing it.
Inflation is another persistent pressure that may have led to today’s cut decision (annual inflation is 1%).
Though the RBA can ease monetary policy to stimulate spending, the rate cut will be limited in creating demand across the economy without complementary fiscal policy from the government.
Rate cuts appear to have previously stimulated spending in the Sydney and Melbourne property markets, with investment also spilling over to regional NSW, Tasmania and parts of Queensland.
Graph 2 plots annual capital growth rates in the Melbourne and Sydney markets alongside the RBA cash rate.
Graph 2: Annual Capital Growth in Sydney and Melbourne vs RBA Cash Rate
Source: RBA & Onthehouse.com.au
The graph reveals that while rate cuts have not had an immediate impact on annual growth, a succession of rate cuts appear to be followed by higher rates of annual growth in these markets.
In the shorter term, the data is indicating a rebound in the Sydney house market, with the median house value increasing 2.94% over the June quarter.
Sydney unit growth was also strong at 1.85%, while Melbourne houses and units recorded growth in values of 2.37% and 2.29% respectively over the June quarter.
The new financial year may have also contributed to the surge in property prices in June.
As banks have had to limit investor mortgage portfolio growth to 10% per year, the new financial year may have allowed new investors to secure loans.
Other economic indicators have been mixed.
The seasonally adjusted unemployment and participation rates both increased by 0.1 percentage point in June, to 5.8% and 64.9% respectively.
Business confidence in Australia increased significantly in June, though consumer confidence fell below 100 in July indicating pessimism about income, employment and spending among households.
The Australian stock market has trended steadily upwards in July, largely unaffected by recent uncertain events such as the Brexit and the federal election.
Given the relative stability of the Australian economy in the post Brexit shock, and the impact that continued rate cuts can have on Sydney and Melbourne property prices, it is unlikely that a further rate cut will follow in September.
Monetary policy has been limited in improving inflation or maintaining a low AUD.
Source: On the House
Peter Arnold (RateCity.com.au) Comment:
Variable home loan rates are set to dip below 3.5 per cent this month – the lowest on record – following today’s decision by the Reserve Bank to cut the cash rate to 1.50 per cent.
At this rate, repaying the average, $300,000, 30-year home loan will cost less than $50 per day.
Today’s cut means we’re now likely to see rates hit new lows of under 3.5 per cent, with rates of 4 per cent becoming the new norm.
On average, today’s cut will put an extra $45 a month back into the pockets of anyone with a variable home loan, or more than double that for those living in the cities of Sydney or Melbourne.
Most people will have no shortage of ways to spend this extra cash, but if you want to maximise your savings, one of the best places to put it is back into the mortgage,” he said.
Today’s decision by the Board to implement another rate cut in the space of three months means there’s every chance some lenders will opt to keep some of the cut for themselves this time around.
Not all lenders passed on the full 0.25 percentage point saving after the May rate cut, with just 0.18 percentage points making its way to customers on average, leaving borrowers $183 million out of pocket,” he said.
Call your bank and find out what they intend to do, because if you live in the home you own, and you’re still paying over 4.5 per cent after this cut, then you should seriously consider whether you’re getting value for money.
Impact of a 0.25 percentage point rate cut
|Average home loan size||Monthly repayment before August 2016 cut||Monthly repayment after August 2016 cut||Monthly saving after August 2016 cut||Total annual repayment with no cuts||Total annual repayment after August 2016 cut||Total savings over a year if rates cut|
Calculations based on a 30-year home loan at the average SV rate of 4.71 per cent
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