Last month, the Reserve Bank of Australia cut the official interest rate to a historic low of 1.25 per cent.
After a month of speculation, at their July meeting they have decided to cut rates again to 1% to a new record low.
However, while a record low, the decision was not a surprise.
Here’s what the experts have to say:
Martin Lakos ( Macquarie) comment:
After delivering an interest rate cut at the last RBA meeting, Governor Phillip Lowe noted that it was “not unreasonable to expect a lower cash rate” and the market did not have to wait long, with the RBA cutting the official cash rate by 0.25% to 1% at its July meeting.
The RBA is targeting business investment to lower unemployment with these rate cuts, as a tighter labour market is needed to support wages growth and household spending.
Given risks to growth, Macquarie has revised down its expectations for interest rates here in Australia.
Notwithstanding a likely pause by the RBA to see if recent cuts gain traction, we see official interest rates going as low as 0.5% by the end of 2021.
Comments from Tim Lawless:
At their monthly board meeting today the RBA decided to cut interest rates.
The likelihood of an interest rate cut had been rising throughout June, particularly since the weak GDP reading in early June and following RBA Governor Phil Lowe’s speech which indicated that a single 25 basis point cut to rates (which was delivered last month) was unlikely to shift the path that we are on.
The decision to cut interest rates is an attempt from the RBA to support the economy; the decision has very little to do with housing market conditions.
In fact, the ongoing slowing of the rate of decline in dwelling values throughout 2019 and the recent uptick in Sydney and Melbourne dwelling values, would likely have reduced concerns of further wealth erosion from housing.
Furthermore, the 25 basis point cut in June along with the cut today and the likelihood of reduced serviceability buffers from APRA are likely to be further positives for the housing market and encourage an ongoing gradual levelling in the housing downturn nationally.
Despite these positives, the introduction of the Banking Code of Conduct and the expansion of Comprehensive Credit Reporting from the beginning of July will ensure that although taking out a mortgage may become a little easier, the scrutiny on loan applications will remain significantly greater than it has been in the past.
Given this, the expectation is that a recovery in housing market conditions is likely to be slow and gradual despite lower interest rates.
No doubt attention will now turn to mortgage rates and how much of the cash rate cut will be passed through to mortgages.
Our expectation is that banks will be holding back on passing on the full cut as they seek to balance out mortgage rates with deposit rates and protect net interest margins
Comments from the RBA:
At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.00 per cent.
This follows a similar reduction at the Board’s June meeting.
This easing of monetary policy will support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.
The outlook for the global economy remains reasonable.
However, the uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy are tilted to the downside.
In most advanced economies, inflation remains subdued, unemployment rates are low and wages growth has picked up.
The slowdown in global trade has contributed to slower growth in Asia.
In China, the authorities have taken steps to support the economy, while continuing to address risks in the financial system.
Global financial conditions remain accommodative.
The persistent downside risks to the global economy combined with subdued inflation have led to expectations of easing of monetary policy by the major central banks.
Long-term government bond yields have declined further and are at record lows in a number of countries, including Australia.
Bank funding costs in Australia have also declined, with money-market spreads having fully reversed the increases that took place last year.
Borrowing rates for both businesses and households are at historically low levels.
The Australian dollar is at the low end of its narrow range of recent times.
Over the year to the March quarter, the Australian economy grew at a below-trend 1.8 per cent.
Consumption growth has been subdued, weighed down by a protracted period of low income growth and declining housing prices.
Increased investment in infrastructure is providing an offset and a pick-up in activity in the resources sector is expected, partly in response to an increase in the prices of Australia’s exports.
The central scenario for the Australian economy remains reasonable, with growth around trend expected.
The main domestic uncertainty continues to be the outlook for consumption, although a pick-up in growth in household disposable income is expected to support spending.
Employment growth has continued to be strong. Labour force participation is at a record level, the vacancy rate remains high and there are reports of skills shortages in some areas.
There has, however, been little inroad into the spare capacity in the labour market recently, with the unemployment rate having risen slightly to 5.2 per cent.
The strong employment growth over the past year or so has led to a pick-up in wages growth in the private sector, although overall wages growth remains low.
A further gradual lift in wages growth is still expected and this would be a welcome development.
Taken together, these labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.
Inflation pressures remain subdued across much of the economy.
Inflation is still, however, anticipated to pick up, and will be boosted in the June quarter by increases in petrol prices.
The central scenario remains for underlying inflation to be around 2 per cent in 2020 and a little higher after that.
Conditions in most housing markets remain soft, although there are some tentative signs that prices are now stabilising in Sydney and Melbourne.
Growth in housing credit has also stabilised recently.
Demand for credit by investors continues to be subdued and credit conditions, especially for small and medium-sized businesses, remain tight.
Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.
Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy.
It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.
The Board will continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time.
Comments from the Finder.com.au
Homeowners rejoice, savers brace as RBA cuts to 1.00%
- In a move not seen in more than a decade, the Reserve Bank of Australia (RBA) has cut the cash rate twice in two months.
- Now at 1.00%, the rate was last lowered in consecutive months in 2008 when it was slashed at five consecutive meetings from 7.25% in August to 3.25% in February of 2009.
- Of the 40 experts and economists polled in the latest Finder RBA Cash Rate Survey™, 68% (27/40) correctly tipped the easing.
- Graham Cooke, insights manager at Finder, said last month’s cut – the first change to the cash rate in almost three years – was perhaps too small to make the desired impact.
- “The objective is to lower unemployment, boost wage growth and push inflation back to target. It’s clear that one cut isn’t enough.
- “Frankly, two cuts might not be either, but it’s a step in the right direction and it’s great news for homeowners. It’s two down and maybe one or two more to go.
- “On an average mortgage, if your bank passes on both rate cuts in full – that is a 50 basis point reduction – you could be saving almost $42,000 over 30-years.”
- Nicholas Frappell, Global General Manager at ABC Bullion, predicted the rate drop off the back of RBA comments about not making inroads into spare capacity in the Australian economy.
Potential savings on different loan amounts:
- Jacqueline Dearle of Mortgage Choice Limited predicted the cut and said, should they be passed on, they’ll give the property market a nudge in the right direction.
- “[A cut will be] great for first home buyers and property investors but the fall in official interest rates will not be so welcome to those Australians with cash savings in the banks, who may see their returns diminish if the banks trim back their rates further from the current average rate of 1.4%,” Dearle said.
Savers bracing for the worst
- “While mortgage holders are rejoicing about the first rate cuts since August 2016 and a record low cash rate of 1.00%, it’s a different story for those relying on interest from their savings, particularly retirees,” Cooke said.
- Australians currently have $526 billion in savings accounts across the country, according to Finder research.
- If banks pass on the RBA’s 50 basis point interest rate cut from the last two months in full, Aussies could lose a staggering $2.6 billion in interest over the course of a year.
- A drop of 75 basis points could mean $3.9 billion less.
- “So far, many of the top high-interest savings accounts have reduced their rates and some have even dropped by more than the 25 basis point cut from June, such as Suncorp Growth Saver and CommBank NetSaver.
- “For those with a few thousand dollars in savings, a cut might seem like a drop in the ocean, but this has huge consequences for retirees living off their interest.
- “It’s a timely reminder to stay on top of your savings account and see if you could be getting a better deal – especially as high rates will be harder to find,” Cooke said.
- “But remember, don’t make a decision based on rate alone – always factor in the home loan’s features and whether these fit with your goals and lifestyle so you’re not stung down the track.”
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