With plenty of speculation that a rate cut would be on the cards today, the Reserve Bank has revealed its decision on official interest rates.
The RBA followed market consensus and cut interest rates to a new record low of 1.25 per cent, down from the 1.5 per cent level they had rested at since August 2016.
The announcement came just hours after the ABS released figures showing a 0.1 of a percentage point fall in retail turnover in April, seasonally adjusted.
Ben Faulkner from the Bureau said there were “mixed results across industries”, with the biggest fall in clothing, footwear and personal accessories (-1.2 per cent), while department stores posted the biggest increase for the month, up by 1.8 per cent.
Lenders are expected to reveal what – if any – reduction they will pass on to borrowers over the coming days.
With the Reserve Bank making the first change in interest rates in almost three years, the burning question has now become how much lower can rates really go.
“The move by the RBA to cut rates was widely expected, and no doubt the focus will now turn to mortgage rates; how low will they go?,” said Tim Lawless, head of research at property data firm CoreLogic.
“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.
“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, Mr Lawless suggested that rate cuts alone are not enough to stimulate the nation’s relatively weak economy – particularly 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.”
Don’t expect flow-through in a hurry
Finder said ahead of the RBA’s announcement that 32 of the 35 experts on its RBA Cash Rate Survey panel had forecast the rate cut, and that most are predicting another one to come before the official rate bottoms out at 1 per cent.
According to the comparison site, today’s cut – if passed on in full by banks – would take the average variable mortgage rate down to 4.66 per cent, saving borrowers around $906 in annual repayments on a $500,000 loan.
However, Finder’s Graham Cooke warned borrowers not to hold their breath for banks to pass on the cut.
“Just three of the four big banks passed on the full cut last time around – and waited up to 20 days to do so – therefore, borrowers should brace themselves and put matters into their own hands,” he said.
“If you don’t get the full rate cut, vote with your feet.”
RBA will need to hold fire on future cuts
The Reserve Bank should be sparing in any more rate cuts, saying it “will need to leave plenty of fuel in the tank”, according to John Kolenda of mortgage aggregator Finsure, in order for it to be able to grapple with global issues such as the US–China trade war.
“What happens with future rate movements by the RBA will largely depend on whether there is a deeper deterioration in the US–China trade war and the impact that has on the global economy and the flow-on effect in Australia,” Mr Kolenda said.
“I think, however, if that situation does occur, the federal government can also take some action to address the broader implications of the impact on the Australian economy.
“Some of the initiatives they have already announced such as the First Home Owner Deposit Scheme, tax cuts and infrastructure spending will flow through the economy to help negate any global economic headwinds.”
He added: “It should also be remembered that while there is so much focus on interest rates, the macroprudential tools implemented by the regulators have had more impact on the economy over the last few years than a record low official cash rate.”
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.