The Reserve Bank of Australia has cut official interest rates by 25 basis points to a record low of 0.75 per cent.
Going into the meeting of the RBA, markets were predicting that there was a 79 per cent chance that there would be a rate cut at the October meeting.
This year, the RBA has cut rates three times, taking the cash rate from 1.5 per cent to the current record-low of 0.75 per cent.
RBA governor Philip Lowe is still targeting the unemployment rate and will keep rates low going forward, according to the accompanying statement.
“It is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target,” Dr Lowe said.
“The Board took the decision to lower interest rates further today to support employment and income growth and to provide greater confidence that inflation will be consistent with the medium-term target,”
“The Board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.”
A win for homeowners
It’s a move welcomed by the REINSW, with CEO Tim McKibbin calling it a win for current and future homeowners.
“This decision to cut rates will come as a welcome relief for homeowners servicing a mortgage. Recent CoreLogic data has revealed at least 7 per cent of homeowners are struggling to meet their loan repayments right now,” Mr McKibbin said.
Ray White Group Managing Director Dan White also welcomed the move by the RBA and feels it will boost buyer confidence.
“This rate slash is also one less economic factor working against people attempting to buy into the property market, meaning more people can realise their dream of owning a home.
“Today’s rate cut by the RBA is a win for anyone looking to make a move in the property market, provided it’s passed on by banks and lenders to its customers,” Mr White said.
Chief Executive Officer of Mortgage Choice, Susan Mitchell says the move was great for homeowners, but is unsure of how much more the RBA can cut rates.
“Today’s decision from the Reserve Bank comes as no surprise and it begs the question, how low can the cash rate go?
“If you asked me this time last year what a competitive interest rate was, I would have said that if your rate didn’t start with a 3, you were paying too much but today we have lenders on our panel offering loans starting with a 2.
“This historically low rate environment has put borrowers in a great bargaining position.”
Will banks pass on the cut?
The average homeowner could save up to $57 a month and $682 a year if the 0.25 rate cut is passed on in full. This is based on an owner occupier paying principal and interest on a $400,000 loan.
Chief executive at RateCity.com.au, Paul Marshall said with rates already so low, some banks would find it hard to pass today’s cut on in full.
“It’s a juggling act between the interests of savers, borrowers and shareholders, especially now interest rates are in uncharted territory,” he said.
“That said, wholesale funding pressures have significantly come down, so some banks will step up and pass on a full cut.
“The RBA may be forced to cut rates again this year particularly if the next inflation figures come in below expectation and the unemployment rate rises further,” he said.
Despite the decision to drop rates, REIQ CEO Antonia Mercorella believes the move by the RBA could in-fact hurt underlying confidence in the economy.
“Dropping interest rates to below one per cent may have a negative impact on consumer confidence in the economy, and we know that when people are experiencing uncertainty, they are less likely to make major financial decisions, such as buying or selling property,” Ms Mercorella said.
“Whether or not an additional interest rate cut will have any material impact on the current state of the property market remains to be seen.”
The government needs to do more
On the back of the cut from the RBA, LJ Hooker’s head of research, Mathew Tiller, believes it is now time for the government to step up and do their part.
“Given the muted economic effect of the last two rate cuts, the RBA will continue to push its message that more fiscal stimulus is required to boost economic growth – a call out to the government to reassess its expenditure.
“We have a situation where the government’s tightening of fiscal policy is working against the RBA’s loosening of monetary policy. The federal government recently announced that the budget was ‘back in balance’ at a time when it needed to be spending more to help businesses create jobs, support household budgets and deliver large infrastructure projects.”
Nerida Conisbee from REA Group believes the government tax cuts haven’t helped and we are still waiting on some positive signs from the economy.
“There are a number of problems in the economy at the moment, which the RBA is trying to solve through rate cuts, but to-date we haven’t seen a positive turnaround,” Ms Conisbee said.
“The big problem is the rising unemployment rate and resulting weak wages growth. Unemployment is particularly problematic in two sectors of the economy that are not doing well; retail and property.
“It was expected that interest rate cuts and the midyear tax cuts would stimulate retail spending, but this doesn’t appear to be happening. As a result, employment in retail has also been lacklustre.
“With the RBA cutting rates in quick succession to a weak economic response, we should prime ourselves for more cuts. The next one is likely to be handed down in early 2020.”