The Reserve Bank of Australia (RBA) has been forced to make an emergency rate cut today, slashing official rates to a new record low of 0.50 per cent.
The big question is how much banks will pass on to homeowners.
The board took its decision today to support our economy in the face of a number of headwinds.
It comes as central banks around the world race to get ahead of the rapidly spreading coronavirus epidemic.
In fact the money markets have factored in a 90% chance of a follow-up rate cut in April.
Beyond that there is the prospect of Quantitative Easing .
Clearly the RBA is not concerned about housing price implications, but it is more interested in getting pre-emptively to shore up our economy.
Recently its aim of lowering unemployment to raise wages growth has been hit by a rising jobless rate, we could jobs growth and rising unemployment.
But the big news over the last week, and it appears to be getting bigger, is the effects of the corona virus.
Whether this will turn into major pandemic, or it will just be another run-of-the-mill frightening event that fades into obscurity, it is certainly creating widespread economic upheavals in Australia and also to the world’s economy with a profound effect on stocks, bonds, currencies, commodities and interest rates.
Some of the other concerns impacting on the board’s decision include:
- Weaker jobs growth in Australia and a rising unemployment rate
- Poor retail sales in Australia even before the recent impact of the corona virus
- The impending economic impact of the corona virus including
- Reduced demand for our export sector including foreign Students, tourists and business travel
- Reduce business confidence as reflected in the sharemarket collapse
The impact of low interest rates would include:
- It could restore both consumer and business confidence
- A lower Australian dollar to stimulate our export sector
- Improvement to domestic consumption
Improved business performance
Here’s what other commentators have to say:
Comments from the RBA:
At its meeting today, the Board decided to lower the cash rate by 25 basis points to 0.50 per cent.
The Board took this decision to support the economy as it responds to the global coronavirus outbreak.
The coronavirus has clouded the near-term outlook for the global economy and means that global growth in the first half of 2020 will be lower than earlier expected.
Prior to the outbreak, there were signs that the slowdown in the global economy that started in 2018 was coming to an end.
It is too early to tell how persistent the effects of the coronavirus will be and at what point the global economy will return to an improving path.
Policy measures have been announced in several countries, including China, which will help support growth.
Inflation remains low almost everywhere and unemployment rates are at multi-decade lows in many countries.
Long-term government bond yields have fallen to record lows in many countries, including Australia.
The Australian dollar has also depreciated further recently and is at its lowest level for many years.
In most economies, including the United States, there is an expectation of further monetary stimulus over coming months.
Financial markets have been volatile as market participants assess the risks associated with the coronavirus.
Australia’s financial markets are operating effectively and the Bank will ensure that the Australian financial system has sufficient liquidity.
The coronavirus outbreak overseas is having a significant effect on the Australian economy at present, particularly in the education and travel sectors.
The uncertainty that it is creating is also likely to affect domestic spending.
As a result, GDP growth in the March quarter is likely to be noticeably weaker than earlier expected.
Given the evolving situation, it is difficult to predict how large and long-lasting the effect will be.
Once the coronavirus is contained, the Australian economy is expected to return to an improving trend.
This outlook is supported by the low level of interest rates, high levels of spending on infrastructure, the lower exchange rate, a positive outlook for the resources sector and expected recoveries in residential construction and household consumption.
The Australian Government has also indicated that it will assist areas of the economy most affected by the coronavirus.
The unemployment rate increased in January to 5.3 per cent and has been around 5¼ per cent since April last year.
Wages growth remains subdued and is not expected to pick up for some time.
A gradual lift in wages growth would be a welcome development and is needed for inflation to be sustainably within the 2–3 per cent target range.
There are further signs of a pick-up in established housing markets, with prices rising in most markets, in some cases quite strongly.
Mortgage loan commitments have also picked up, although demand for credit by investors remains subdued.
Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.
Credit conditions for small and medium-sized businesses remain tight.
The global outbreak of the coronavirus is expected to delay progress in Australia towards full employment and the inflation target.
The Board therefore judged that it was appropriate to ease monetary policy further to provide additional support to employment and economic activity.
It will continue to monitor developments closely and to assess the implications of the coronavirus for the economy.
The Board is prepared to ease monetary policy further to support the Australian economy.
Tim Lawless, Corelogic, comments:
The decision by the RBA to cut rates was widely expected considering the downside impact of coronavirus on the Australian economy and household sentiment.
The cut also comes as inflation remains well below the RBA target range, labour markets hold plenty of slack with an underemployment rate of 8.5 per cent, and wages growth tracks at a near record low of 2.2 per cent.
Lower interest rates would normally be a catalyst for an acceleration in housing demand and value growth, however there is less certainty that this will add fuel to the housing market in the current economic climate.
This is partly because the latest rate cut is unlikely to be fully passed on to mortgage rates.
Furthermore, a low cash rate coupled with concerns around the global spread of coronavirus, has the potential to spook consumers and drag confidence lower.
Buying or selling a home is a high commitment decision; if consumer confidence slips further from already low levels, we could see Australian households sit on their hands rather than decide to buy or sell, which would weigh on market activity.
Since the rate cutting cycle began in June last year, housing markets have responded swiftly and positively.
The CoreLogic national home value index increased 7.9% from June to the end of February.
Considering the housing sector has been one of the few positive areas of the Australian economy, a slowdown in housing market conditions could add to the downwards pressure on economic growth that is expected over coming months as key industry sectors such as tourism, education and commodity exports are impacted by the coronavirus outbreak.
Comments from the Finder.com.au RBA Survey:
Masks on, scissors out: RBA cuts cash rate to 0.50%
Taking swift action in response to global and domestic markets, the Reserve Bank of Australia (RBA) cut the cash rate to an all-time low of 0.50% today.
The decision can be seen as a reaction primarily to the coronavirus, COVID-19, and its massive effect on global commerce
In the latest Finder RBA Cash Rate Survey™, the largest of its kind in Australia – 39 experts and economists made their predictions, with only 15% (6/39) correctly predicting the easing of the rate
Finder surveyed the experts and economists between 20-25 February.
Graham Cooke, insights manager at Finder, said the reason that so many experts didn’t foresee the RBA’s March decision came down to timing.
“Today’s cut may not seem unprecedented now, but just a few days ago, it did.
“To put in perspective how improbable this all is, last Friday, oddsmakers placed the chance of a 25-basis-point cut as less likely than when 15-year-old Coco Gauff beat Serena Williams in the first round at Wimbledon in 2019.
“What a difference a week makes,” Cooke said.
Finder also asked experts about the likelihood of the ASX losing 10% by the end of the year due to coronavirus, and only half saw it as likely.
“By the time we had analysed survey results on Friday evening, the ASX200 had already lost 10%.
“That would be like if the average home lost $50,000 of value in a week.
“Nobody saw this coming,” Cooke said.
Shane Oliver from AMP Capital, is one of the six experts who correctly predicted the cut this month and he doesn’t think it will be the only easing of 2020.
“The coronavirus outbreak coming on the back of the bushfires is likely to see the economy go backwards this quarter which in turn is likely to push unemployment up further after the rise to 5.3% seen in January.
“Growth should rebound in the March quarter but given…we are so far from full employment and the inflation target, the RBA is likely to cut the cash rate again in the months ahead,” Oliver said.
Even with the cut today, 18% expect the rate will get to 0.25% before 2021.
Cooke said it comes down to how well the virus is contained.
“An already weak economy is now under significant threat due to coronavirus. What happens now will likely depend on how fast it spreads, and to what degree Australian authorities can contain it.
“Remember, though, that even if the current spread of the virus does fizzle out, another – potentially stronger – wave is possible during the Northern Hemisphere’s winter,” Cooke said
How much you could save
Cooke said every RBA cash rate cut is a blessing to borrowers and a punch in the gut to savers.
“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.
“If your bank passes on a partial cut of only 10 basis points, that could still save you $10,000 over 30 years on an average loan.
Potential rate cut savings if banks pass on a partial cut
“Keep an eye on your lender’s website and digital channels to see how they are responding. If they aren’t passing on the cut, it might be time to shop for a new home loan.
“However if your lender passes on the full 25 basis point cut, an average mortgage holder could save $25,000 over 30 years on their mortgage,” Cooke said.
Potential rate cut savings on different loan amounts
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