The Reserve Bank of Australia has cut interest rates for the first time in almost three years at its June board meeting.
This ends Australia’s longest period of steady monetary policy, with rates remaining on hold at every meeting since August 2016.
It comes after significantly below-target inflation, stalled wages growth, a two-month rise in Australia’s unemployment rate, a sharp slowdown in domestic and global economic growth .
Here’s what the experts have to say:
Martin Lakos ( Macquarie) comment:
An interest rate cut was all but ensured by the RBA Governor Phillip Lowe when he spoke at the Economic Society of Australia in Brisbane last month, noting the RBA board was considering the case for lower interest rates.
In May, the RBA board discussed a scenario in which there was no further improvement in the labour market and the unemployment rate remained around the 5% mark. In this scenario, they judged that inflation was likely to remain low relative to the target of 2-3% and that a decrease in the cash rate would likely be appropriate.
The RBA has now delivered, by cutting the official cash rate by 0.25% to 1.25%, the first move in rates since August 2016.
Comments from Tim Lawless:
The move by the RBA to cut rates was widely expected, and no doubt the focus will now turn to mortgage rates; how low will they go?
Mortgage rates for owner occupiers are already around the lowest level since the 1960’s and lenders are generally expected to pass on most, if not all of the cash rate cut to mortgage interest rates.
Lower mortgage rates, together with the likelihood of lower borrower serviceability assessments if APRA delivers on a relaxation to the base serviceability rate later this month, as well as renewed confidence following the federal election, are likely to see an improvement in housing market activity.
However, with credit policies remaining tight, the stimulus of lower rates isn’t likely to be as effective in kick starting the housing market as what we have seen in the past.
Borrowers are facing much closer scrutiny on their income and expenses as lenders become less reliant on HEM (Household Expenditure Measure) benchmarks, and comprehensive credit reporting is providing lenders with greater transparency around borrower debt levels and credit standing.
Overall, the latest rate cuts together with lower serviceability assessments for borrowers and greater confidence following the federal election should help to support an earlier than expected trough in housing values, but we aren’t expecting a rapid reversal in house price declines due to ongoing tight credit policies and, more broadly, economic uncertainty as global trade tensions escalate.
Comments from the RBA:
At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.25 per cent.
The Board took this decision to 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, although the downside risks stemming from the trade disputes have increased.
Growth in international trade remains weak and the increased uncertainty is affecting investment intentions in a number of countries.
In China, the authorities have taken steps to support the economy, while addressing risks in the financial system.
In most advanced economies, inflation remains subdued, unemployment rates are low and wages growth has picked up.
Global financial conditions remain accommodative.
Long-term bond yields and risk premiums are low.
In Australia, long-term bond yields are at historically low levels.
Bank funding costs have also declined further, with money-market spreads having fully reversed the increases that took place last year.
The Australian dollar has depreciated a little over the past few months and is at the low end of its narrow range of recent times.
The central scenario remains for the Australian economy to grow by around 2¾ per cent in 2019 and 2020.
This outlook is supported by increased investment in infrastructure and a pick-up in activity in the resources sector, partly in response to an increase in the prices of Australia’s exports.
The main domestic uncertainty continues to be the outlook for household consumption, which is being affected by a protracted period of low income growth and declining housing prices.
Some pick-up in growth in household disposable income is expected and this should support consumption.
Employment growth has been strong over the past year, labour force participation has been increasing, the vacancy rate remains high and there are reports of skills shortages in some areas.
Despite these developments, there has been little further inroads into the spare capacity in the labour market of late.
The unemployment rate had been steady at around 5 per cent for some months, but ticked up to 5.2 per cent in April.
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 expected and this would be a welcome development.
Taken together, these labour market outcomes suggest that the Australian economy can sustain a lower rate of unemployment.
The recent inflation outcomes have been lower than expected and suggest subdued inflationary pressures 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 1¾ per cent this year, 2 per cent in 2020 and a little higher after that.
The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities.
Conditions remain soft, although in some markets the rate of price decline has slowed and auction clearance rates have increased.
Growth in housing credit has also stabilised recently.
Credit conditions have been tightened and the demand for credit by investors has been subdued for some time.
Mortgage rates remain low 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 to support sustainable growth in the economy and the achievement of the inflation target over time.
Comments from the Finder.com.au | New low puts borrowers on a $21,000 high
- In a widely predicted outcome, Australian borrowers were granted a cash rate cut of 1.25% today – a move that broke the mould of the Reserve Bank of Australia’s (RBA) hold strategy of almost three years.
- The central bank slashed the cash rate by 25 basis points which was correctly predicted by 91% (32/35) of panellists from Finder’s RBA Cash Rate Survey, who cited a spike in unemployment and below-target inflation as contributing factors.
- This is the first time the cash rate has reached this level since it was first regulated in 1990.
- The easing of monetary policy will likely continue throughout the year with most experts (59%) anticipating two rate cuts in 2019, and one-in-five market analysts (22%) predicting three rate cuts this year.
- Graham Cooke, insights manager at Finder, said a 1.25% cash rate is groundbreaking.
- “This is uncharted territory for us and if two more rate cuts are enforced this year, we could potentially see a rate of 0.75% which is unheard of in Australia.
- “It’s almost hard to fathom what it was like for borrowers 11 years ago with a 7% cash rate, let alone the 17% cash rate back in 1990,” he said.
- CEO of Lateral Economics, Nicholas Gruen said the rate will drop with the election out of the way.
- “[The RBA’s] last set of minutes made up excuses not to cut during the campaign. They should cut by more [than 25 basis points], but I doubt they will,” Gruen said.
- Should historical market behaviour continue, Finder expects the average home loan size – $384,700, according to the Australian Bureau of Statistics – will increase following this cut, as it has in the month following eight of the last 10 rate cuts.
- “The average home loan size increase following the last 10 rate cuts was 1.3%. This could add almost $5,000 to the average size of home loans nationally,” Cooke said.
- Cooke said the rate cut is just one of a number of changes that will likely increase mortgage demand.
- “In recent weeks we’ve seen auction rates bounce back in many states for the first time in months.
- “With interest rates dropping, and loans becoming both cheaper and easier to attain, this could very well be the turning point for the slumping housing market.
- “However, these previous cuts occurred in environments where house prices were increasing, so we’ll have to wait and see how the market responds this time,” he said.
- Cooke said now is the time for borrowers to take matters into their hands to ensure they get a better deal on their existing loan.
- “We’ll all be watching the banks, particularly the big four, to see how – and how quickly – they respond to today’s news.
- “While many lenders may pass on a cut to their customers, you may not see the full 25 basis point cut applied to your loan. Keep an eye on your lender’s website and digital channels to see how they are responding to the rate cut and how this will affect your mortgage.
- “If you’re not satisfied, don’t settle – this environment makes it a great time to go home loan shopping,” Cooke said.
- The average home loan size in Australia is $384,700, while the average variable rate sits at 4.91%. A reduction of 25 basis points to 4.66% could lead to a savings of almost $700 per year, which is equivalent to almost $21,000 over the life of your loan.
- Alternatively, if the average Aussie chose to continue paying down their mortgage at their previous rate this could shave almost two years (22 months) off their loan term, meaning they could become mortgage-free sooner. In addition, they could pocket around $43,000 in interest saved.
- If you’re open to using a smaller lender, switching to a 4.00% rate could save you $200 a month and nearly $75,000 over 30 years.
- Finder currently has more than 30 home loan rates below 4.00%.
- Meanwhile the lowest variable rate is 3.29% (Mortgage House Home Loan Prime), while the lowest overall rate in market is a record-low 2.9% (Greater Bank; 1-Year Fixed).
- Cooke said borrowers are in a prime position to choose from a vast range of options.
- “Use online resources such as a repayment calculator or a switching cost calculator to forecast your calculations so you make an informed decision.
- “We’re talking record low rates and the potential to save thousands of dollars,” Cooke said.
- Stay updated on which banks have reduced home loan rates on this page.
Potential savings based on mortgage sizes
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