Experts are warning that the RBA’s choice to lower the cash rate by 25 basis points to 0.50 of a percentage point, in an effort to support the economy as it responds to the global coronavirus outbreak, will not yield a magic fix.
Tuesday’s decision by the RBA to decrease rates didn’t shock many, with pundits and economists predicting a downward move as Australia battles to contain the effects of the coronavirus on its economy.
Acknowledging that the global outbreak of the coronavirus is expected to delay progress in Australia towards full employment and the inflation target, the RBA judged that “it was appropriate to ease monetary policy further to provide additional support to employment and economic activity.”
The board also acknowledged that further cuts are possible as it explores means to further support the Australian economy.
‘Keep expectations in check’
However, CCIQ chief economist Dr Marcus Smith warned that expectations should no be inflated.
He opined that while the decision will be framed in the context of reducing mortgage and business loan rates to put more money in consumer’s pockets, there are questions about what a decrease at such low interest levels can actually achieve.
“Monetary policy is a blunt instrument and there are wider implications, such as it decreasing income and spending power for retirees and investors who live off interest income,” Mr Smith said.
“It also has long lags and takes many months to transmit throughout the economy before affecting consumer and investor behaviour.
“The RBA can target interest rates or the exchange rate, but not both; a decrease in interest rates will also put downward pressure on the Australian dollar.”
Mr Smith encouraged governments to begin using a fiscal stimulus package to complement the impact of the monetary policy as “it is more targeted and has shorter lags to take effect”.
Also commenting on the RBA’s move, Prushka Fast Debt Recovery CEO Roger Mendelson said that the rate cut will not impact small business lending as SME finance comes from sources that won’t pass on the rate drop.
“External factors have spurred global markets to crash; however, this does not mean rates should be slashed even further — weak wage growth and low inflation are two reasons that support keeping the rate the same,” Mr Mendelson said.
“The banks are likely to pass on the full reduction, so it’s hard to see this having an impact for anyone who isn’t a home owner.”
He judged that the RBA’s decision will not stimulate consumer spending, instead explaining that it will only fuel the rise in house prices we are already seeing in our main cities.
PM tells big banks to follow lead
Ahead of the rate decision, Prime Minister Scott Morrison urged the big four to follow the RBA’s lead and pass on any cuts in full to support the economy.
“There is no doubt that if the bank were to take a decision today on cash rates that the government would absolutely expect the four big banks to come to the table and to do their bit in supporting Australians as we go through the impact of the coronavirus,” the PM said.
Westpac was first to the table, announcing it will pass on the savings in full to home loan and small business customers within an hour of the RBA’s decision.
“We recognised that COVID-19 will have a direct impact on our nation’s economy and we want to provide additional support to our small business and home loan customers at this unprecedented time,” Westpac consumer CEO David Lindberg said.
Commonwealth Bank followed suit, announcing on Twitter: “Following the RBA’s cash rate decision, we have reduced the variable rates for our home loan customers by 0.25% p.a.”
Just before 4pm, NAB also announced reductions of 25 basis points to interest rates across its variable home loan products as well as its variable small business options loan and business overdraft facilities, effective 13 March.
ANZ was the last of the big four to cut, announcing two hours after the RBA’s statement that they too would be passing on 25 basis points in full for variable rate customers, effective from Friday, 13 March. In addition, investor interest-only loans will be reduced by 35 basis points.
Small banks step up
Australia’s first smartbank 86 400 was also among the first to commit to the full 25 basis point rate cut to new and existing owner-occupied and investment home loan customers.
“Passing on the full rate cut today underscores our commitment to helping Australians take control of their money,” said Robert Bell, 86 400 CEO.
Athena Home Loans also reacted immediately, announcing a fourth consecutive rate cut, on par with the RBA’s decision.
“For the fourth time in a row, Athena has immediately passed on the full RBA rate cut to all customers. None of the 12 largest home loan lenders have done this. This is money that should be in the pockets of Aussie families,” said Nathan Walsh, co-founder and CEO of Athena Home Loans.
Maja Garaca Djurdjevic is the editor of My Business.
Maja has an extensive career as a journalist across finance, business and market intelligence. Prior to joining Momentum Media, Maja spent several years unravelling social, political and economic intricacies in Eastern Europe.
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