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.
