The RBA’s cut to official interest rates demonstrates the weakness prevalent in Australia’s economy, and while some banks have already announced how they will respond, not everyone will enjoy the full savings.
“At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.25 per cent,” the RBA said in its statement announcing the first rate change in three years.
“The Board took this decision to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.”
It said that while the global economic outlook “remains reasonable” and it is sticking with its projected GDP growth this year and next of around 2.75 per cent, “the downside risks stemming from the [US–China] trade disputes have increased”.
The RBA also noted that while employment growth had remained strong over the past year, unemployment had ticked upwards in April after months of hovering around 5 per cent and that wages growth remains subdued.
“Taken together, these labour market outcomes suggest that the Australian economy can sustain a lower rate of unemployment.”
ANZ first bank to move, but only in part
Immediately after the RBA made its announcement to cut rates to the new historic low of 1.25 per cent on Tuesday (4 June), ANZ said that it would be cutting variable rates on all of its home loans and residential investment loans.
However, the speed of the announcement may have been designed to offset its customers being left “disappointed” by the bank not passing on the rate cut in full.
Instead, ANZ said its rates would fall by a smaller 18 basis points.
“In making this decision we have weighed up a number of factors, such as business performance, market conditions and the impact on our customers, including our depositors,” said Mark Hand, ANZ’s group executive, Australia retail and commercial.
“While we recognise some home loan customers will be disappointed, in making this decision we have needed to balance the increased cost in managing our business with our desire to provide customers with the most competitive lending and deposit rates possible.”
The change won’t take effect until next Friday, 14 June.
Shortly afterwards, CBA announced via social media that it would pass on the full cut.
“Following the Reserve Bank’s cash rate decision, we will reduce all of our Standard Variable Rate home loans by 0.25% p.a.,” it tweeted.
CBA customers will have to wait even longer for the savings to come through, however, with the reductions not taking effect until 25 June, it said in a subsequent press statement.
“We have carefully considered the RBA rate decision and the current funding environment, together with how we continue to meet our regulatory commitments, capital requirements and community expectations,” said Angus Sullivan, group executive, retail banking services.
The major bank said the reduction would see borrowers save $62 per month on the repayments for a $400,000 owner-occupier, principal and interest mortgage.
NAB was next to show its cards, matching CBA’s commitment to pass on the full rate cut to its variable mortgage customers.
“This will save owner-occupier customers making principal and interest repayments on a $400,000 home loan about $62 per month or $744 per year, which will provide more money in household budgets for other expenses at a time when cost of living remains challenging,” said the bank’s chief customer officer and former NSW Premier, Mike Baird.
“We strongly believe reducing rates is the right thing to do by our customers and reflects our focus on earning trust in the community and rewarding our loyal existing customers.”
Like ANZ, its rate reductions will take effect from Friday, 14 June.
Later that day, Westpac rounded out the announcements from the big four banks, with an unusual split across different loan types.
The bank said that it would not pass on the full rate cut for owner-occupier loans, cutting by 20 basis points. However, it said investors with interest-only variable loans would enjoy a cut larger than the official one, down by 35 basis points.
In its statement, Westpac said that 69 per cent of its customers are ahead on their loan repayments, which includes mortgage offset accounts.
Other lenders pre-empted the RBA’s move
Some lenders, though, had already announced rate reductions ahead of the official announcement.
Last week, ING announced that its two main variable mortgage products would both have their rates fall by up to 17 basis points.
Those cuts took effect from 30 May, the day after they were announced.
That followed a plethora of lenders announcing cuts on their fixed-rate loans over the past fortnight, including NAB, St.George, Bank of Queensland, BankSA and Bank of Melbourne.
Will the rate cut boost business investment?
Some in the business community applauded the cut, suggesting it will aid particularly SMEs to increase their willingness to invest in their business and consumers to invest in property.
“Lowering the cash rate will provide a timely shot in the arm to stimulate parts of the economy that have been struggling,” said Australian Chamber CEO James Pearson.
“Lower interest rates should encourage both business investment and household spending, providing more impetus to keep the economy driving forward.”
Mr Pearson continued: “Many small businesses have been doing it tough over the past year, faced with slowing economic growth and weaker consumer spending.
“Profits, outside of the mining sector, were only 2.5 per cent in the year to December. As a result, business investment has turned down since the beginning of the year, with recent ABS data showing total new capital expenditure in the March quarter 2019 down [by] 0.6 [of a percentage point].
“The Reserve Bank Board’s decision, in combination with increased political certainty following the election, will provide business with more confidence to invest, create more jobs and wealth for the benefit of all Australians.”
Mortgage Choice boss Susan Mitchell, meanwhile, said the cut would provide a boost in confidence for the nation’s ailing property market.
“Today’s cash rate cut is good news for the Australian property market which could see a boost from lower interest rates,” she said.
“The Reserve Bank would be acutely aware that any cuts to the cash rate may serve to bolster overall activity in the property market, and while I do not see dwelling values rebounding to their 2017 peak any time soon, monetary policy stimulus could help put a floor under falling dwelling values.”
Not everyone was convinced that the rate cut will deliver any meaningful impact for SMEs though.
“Our research found SMEs are increasingly less reliant on bank finance, so any rate change, even if passed on, will have minimal impact on the sector,” said Roger Mendelson of Prushka Fast Debt Recovery.
“Realistically, this decision will not stimulate consumer spending either. The banks haven’t committed to passing on the cuts and it’s highly unlikely credit card rates will be cut. And with the pervading issue of low wage growth, it’s hard to see this having a big impact for anyone who isn’t a home owner.”
The business benefit: Going all-in on sustainability
By Adam Zuchetti
Analysis: How likely is an interest rate cut in June?
By Adam Zuchetti
Workplace wellness is the real trickle-down economics
By Adam Zuchetti