The Reserve Bank has delivered its monthly verdict on interest rates, amidst a “will they, won’t they” debate about the prospect of consecutive rate cuts.
It delivered back-to-back rate cuts, taking the official rate down by 25 basis points to a new record low of 1.00 per cent. That followed June’s 25 basis point cut, the first movement in either direction in almost three years.
Many market pundits had expected another rate cut this month, with ANZ even floating the idea that three consecutive reductions could be made.
Some two-thirds of the 40 panellists on Finder’s RBA Cash Rate Survey had anticipated the follow-up reduction. Finder’s insights manager, Graham Cooke, had suggested that June’s cut was too small to have the desired impact.
Separately, CoreLogic research analyst Cameron Kusher suggested the RBA had backed up rhetoric with action.
“The likelihood of an interest rate cut had been rising throughout June, particularly since the weak GDP reading in early June and following RBA governor Phil Lowe’s speech which indicated that a single 25 basis point cut to rates (which was delivered last month) was unlikely to shift the path that we are on,” he said.
However, he said Australia’s property market was unlikely to have been part of the central bank’s decision-making.
“The decision to cut interest rates is an attempt from the RBA to support the economy; the decision has very little to do with housing market conditions,” he said.
“In fact, the ongoing slowing of the rate of decline in dwelling values throughout 2019, and the recent uptick in Sydney and Melbourne dwelling values, would likely have reduced concerns of further wealth erosion from housing.
“Furthermore, the 25 basis point cut in June along with the cut today and the likelihood of reduced serviceability buffers from APRA are likely to be further positives for the housing market and encourage an ongoing gradual levelling in the housing downturn nationally.”
But Mr Kusher cautioned borrowers about being overly optimistic in receiving the full reductions from their lender.
“Our expectation is that banks will be holding back on passing on the full cut as they seek to balance out mortgage rates with deposit rates and protect net interest margins,” he said.
Tough lending market negating low rates
Despite rates remaining steady in July, the RBA conceded that further interest rate cuts are “more likely than not” in the minutes of June’s board meeting.
Yet interest rate cuts alone are unlikely to be enough to support the economy and shore up employment.
In recent weeks, RBA governor Philip Lowe has called on the government to do more to stimulate the economy, while NAB economist Kieran Davies previously said the RBA is considering more “radical” stimulus measures over and above any further rate cuts.
According to John Kolenda, managing director of finance brokerage Finsure, tough lending conditions are negating any benefit of lower interest rates.
“The overriding issue is the lending market is still very challenging,” Mr Kolenda said.
“There are a number of issues making it hard for consumers and housing finance is high on the list. The latest housing finance figures for April 2019, released by the Australian Bureau of Statistics, showed the value of housing finance commitments was 19 per cent below what it was 12 months previously.”
He continued: “We have seen a dramatic reduction in borrowing capacity for consumers, with many being disheartened by the scrutiny of the major banks in analysing their expenses and activities.
“The average consumer qualifies to borrow 20 per cent less now than 12 months ago and the criteria varies drastically across lenders.”
Pain continues for savers
While borrowers and mortgage holders will rejoice — provided that banks do pass on the latest rate reduction — Australian savers face even more pain as interest rates on cash savings are likely to come down too.
According to Finder, today’s rate cut would cut the annual interest earned by $26 on $10,000 in a savings account with an average interest rate of 2.44 per cent.
Meanwhile, for borrowers, the comparison site said that today’s cut will shave $21,384 in interest payments over the 30-year term of a $400,000 mortgage.
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