04 Jun RBA slashes cash rate to all-time low of 1.25 per cent
The Reserve Bank has made the historic move of cutting interest rates to a new all-time low, ending weeks of frenzied speculation.
RBA governor Phillip Lowe made the announcement this afternoon, revealing the cash rate will be slashed by 25 basis points, from a record low of 1.5 per cent.
It now sits at a brand new record low of 1.25 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.
The RBA board said the decision was made “to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.”
“Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy,” the RBA board announced.
“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.”
Dr Lowe said the Australian economy was poised to “grow by around 2¾ per cent in 2019 and 2020” and also touched on “lower than expected” inflation outcomes and the continuing “adjustment in established housing markets” as factors in the decision.
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.
Dr Lowe has never adjusted policy settings during his time in the top job.
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.
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.
But while the market will now react to the wording of the RBA’s policy statement to a certain extent, many expect Dr Lowe’s follow-up speech — scheduled for 7.30pm tonight — to have a far bigger impact.
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
“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.”
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.
Sky News business reporter Chris Kohler told news.com.au the rate cut would be a win for home loan customers and lenders.
“Eyes will turn pretty immediately to the big four banks and whether or not they will pass on the rate cut in full,” he said.
“Josh Frydenberg has been pressuring them pretty hard, but for banks, it’s all about margins.
“But it will be pretty difficult for them not to throw mortgage holders a bit of a bone here, because it will be the first real confidence test for them since the royal commission wrapped up.”
Mr Kohler said a rate cut was a “signal the economy was not all that strong” and said most economists believed it was “the first of many”.
“We’re in uncharted territory — we were already at record low levels, so to take that further means we’re going into unknown areas.”
THE BIG FOUR
Now the official cash rate has been cut, attention is turning to our banks as many 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.
But according to comparison site Mozo, the “big four” banks have pocketed around $3.6 billion in revenue by not passing on the August 2016 cut in full.
Also, by delaying the date at which their partial cuts in August 2016 took effect, they pulled in $7.1 million per day — or $113 million in total.
Yesterday, Australian Retailers Association executive director Russell Zimmerman said while a rate cut would likely boost the retail sector, especially with the recent minimum wage increase and tax cuts coming on July 1, it would be up to banks to ultimately pass those cuts on.
“By the time you add a rate cut plus the increase in minimum wage and the reduction in tax — provided that all goes through — we should see a bit more buoyancy in the economy,” he said.
“It’s probably fair to say if we see some easing of interest rates, the biggest issues will be if the banks actually hand those through. It’s fine to reduce rates, but we need banks to actually hand them through.”
While today’s announcement brings the official cash rate to an all-time low, the highest ever recorded was 21.4 per cent in April 1982 under the Fraser government.
This article is courtesy of news.com.au. For the full article follow the link.