Interest Rate cut to an all-time low of 1.25%

The Reserve Bank has cut the official cash rate for the first time since August 2016. This is what the new record low means for you. The historic move was announced by RBA governor Phillip Lowe this afternoon, ending weeks of frenzied speculation.

The announcement means the cash rate will be slashed by 25 basis points, from a record low of 1.5 per cent.

It was the worst-kept secret in Australian economic news in recent weeks, with pundits universally agreeing a rate cut would be the inevitable outcome of the RBA’s June board meeting.

But many Australian economists predict this is just the first of several cuts headed our way, with a second 25 basis point reduction believed to be on the cards as soon as August. Meanwhile, some even predict up to four cuts to 0.5 per cent by 2020, as the central bank scrambles to kickstart Australia’s stalling economy.

The decision comes in the midst of uncertain economic times, both within Australia and across the globe. Locally, Australia is grappling with a recent increase in the unemployment rate, stagnating wage growth and weak inflation. The housing market has also softened, although the rate of house price falls has slowed down, with mortgage lending practices also loosened.

There are also troubling trends occurring globally, including the US-China Trade War, the Venezuelan crisis, Brexit and Chinese debt.

THE REACTION

Financial markets had fully priced in a 0.25 percentage point cut, and the Australian share market was trading flat this afternoon as investors waited for the central bank’s decision.

CoreLogic head of research Tim Lawless said he expected the focus to now turn to mortgage rates. “Mortgage rates for owner occupiers are already around the lowest level since the 1960s and lenders are generally expected to pass on most, if not all of the cash rate cut to mortgage interest rates,” he said.

“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, he questioned just how effective the rate cut would be.

“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,” he said. “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.”

Meanwhile, Real Estate Buyers Agents Association (REBAA) president Rich Harvey said APRA’s proposed relaxation of the home loan lending rules would be even more helpful for borrowers than today’s rate cut.

“This will have an even greater impact on increasing a borrower’s capacity which will eventually filter its way into the economy and support the property market,” Mr Harvey said.

“While today’s interest rate cut will give borrowers more mild relief from bank interest, the major benefit is that it helps stimulate demand for borrowing and injects confidence into the property market.

“On the flip side it also demonstrates the economy is sluggish and needs monetary policy to generate more activity.”

OTHER IMPACTS

The rate cut will affect almost all Aussies to a certain degree, even those without a mortgage.

Those with savings in the bank will notice less monthly interest coming in, while self-funded retirees will also see their income take a hit.

People who have invested in shares will likely win, as RBA interest cuts usually translate to a share market rally. The cut will likely lower the Aussie dollar, which is good news for people heading overseas on a holiday, and for the export industry.

And given it is designed to encourage spending, it could also give a welcome boost to retail and small business owners.

Now that the official cash rate has been cut, attention will turn to the banks and question whether Australia’s financial institutions will actually pass it on in full.

Treasurer Josh Frydenberg is believed to have already personally asked Australia’s leading financial institutions to pass on the entire rate cut.