What the RBA Rate Cut Means on the Ground
The Reserve Bank of Australia (RBA) recently lowered the official cash rate from 1.5 per cent to the all-time low of 1.25 per cent. As the first move made by the RBA since August 2016, this 0.25 percentage point drop was both largely anticipated and widely applauded. The RBA made the cut in an attempt to stimulate the Australian economy, with weak property growth, low inflation, and worrying employment numbers all causing concern. Most lenders have passed on the rate cut, which has helping to inject some optimism into the Australian real estate market.
Most Australian lenders announced cuts to their variable rate mortgage products following the RBA announcement. Commonwealth, NAB, and AMP all passed the rate cut in full at 0.25 per cent, as did some small lenders such as ING and ME Bank. Despite the post-election and post-Royal Commission environment, a number of lenders only made partial cuts to their mortgage products. Westpac reduced its rates by 0.2 per cent, and ANZ by 0.18 per cent. Many small lenders also made partial cuts, including St George, Suncorp, and Heritage among others.
While most lenders passed on the rate cuts relatively quickly, there were delays from a few days to a few weeks. According to Luke Gardiner from Loans4Homes, the big four banks managed to save a combined total of $108.8 million by making these delays. Market economists are predicting another cut in August, and while unlikely, some experts are forecasting as many as four cuts this year. If the two rate cuts are passed on by the banks, a half percentage point would save borrowers $142 a month on a $500,000 mortgage. Use our Repayment Calculator to calculate the effect on your own mortgage.
The latest Westpac-Melbourne Institute survey was released mid-June, just a couple of weeks after the RBA rate cut. As one of the first ways to measure community reaction since the announcement, the results were somewhat surprising. While Westpac themselves were expecting an "initial boost to the index over the first two months", the reality was very different. Along with interest rates, the index measures things like house price expectations, unemployment expectations, and risk aversion. When other areas of the economy are struggling, the impact of rate cuts is generally more muted.
In the survey, 100 index points represents the breakeven point between optimism and pessimism. Responses collected before the June 4 decision had a combined index of 106.8, with responses collected after the rate cut tumbling to the rather pessimistic 95.5. Sentiment was much higher among people with an investment property, however, with the rate cut and coalition election victory seeing their sentiment rise 9.5 per cent. Sentiment among all mortgage holders rose by 2.8 per cent, with renters more pessimistic at -5.3 per cent.
While rate cuts are known to increase consumer confidence, the extreme nature of current rates has had a reduced effect in the current economic climate. Along with the housing slump and stubbornly low inflation numbers, Australia is also experiencing weak wages growth, dropping employment figures, and low levels of business investment. While lower interest rates will help to stimulate the market over time, an optimistic outlook is going to take much longer to develop.