The Reserve Bank of Australia has cut the official cash rate by 25 basis points to a new low of 0.75% in its October meeting today.
The move was not unexpected, with markets pricing the chance of a cut at around 80%, while 74% of economists surveyed by Bloomberg correctly forecast a cut.
The cash rate of 0.75% is a new record low and marks the first time the Australian cash rate has ever been below 1%.
|Month||Change (bps)||Cash rate|
RBA Governor Philip Lowe said in his statememt that interest rates are very low around the world, and further monetary easing is expected as central banks respond to the persistent downside risks to the global economy.
“The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some established housing markets and a brighter outlook for the resources sector should all support growth,” Mr Lowe said.
“The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending.”
The #RBA cut interest rates 25bp to 0.75% at today’s meeting in line with expectations. Leading into the meeting consensus expectations are for the next cut to be in February, although this could be pulled forward as soon as November should Q3 inflation data disappoint #ausbiz pic.twitter.com/8X5wcITyrE— Alex Joiner (@IFM_Economist) October 1, 2019
According to Mr Lowe, the board took the decision to cut today as new dwelling activity has weakened and growth in housing credit remains low.
“Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality,” he said.
“The economy still has spare capacity and lower interest rates will help make inroads into that.
“The Board also took account of the forces leading to the trend to lower interest rates globally and the effects this trend is having on the Australian economy and inflation outcomes.”
Mr Lowe also said it’s reasonable to expect an “extended period of low interest rates” if Australia is to meet its employment and inflation targets.
Smart Booster Home Loan
- Discount variable for 1 year <=80% LVR
- No ongoing fees
- Unlimited redraw facility
Monthly repayments: $1,476
- Discount variable for 1 year
- No ongoing fees
- Unlimited redraw facility
Stay up to date with the latest rate changesSIGN UP
Increased risk of household indebtedness
CoreLogic head of research Tim Lawless said lower interest rates could lead to higher household debts.
“Although the housing recovery is likely to add to Australia’s economic momentum, it comes amidst record levels of household debt and ongoing affordability challenges,” Mr Lawless said.
“There is a risk that lower interest rates could fuel a further rise in household indebtedness as housing credit picks up and investors once again become more active, while higher housing prices are likely to curb participation from first home buyers despite the lower cost of debt.”
“The rebound in housing conditions should help to support an improvement in economic conditions as higher housing prices translate to a wealthier and more confident household sector who will hopefully be inclined to spend more.”
How low can it go?
Chief Executive Officer of Mortgage Choice Susan Mitchell says this historically low rate environment puts borrowers in a great bargaining position.
“If you asked me this time last year what a competitive interest rate was, I would have said that if your rate didn’t start with a 3, you were paying too much but today we have lenders on our panel offering loans starting with a 2,” she said.
“Today’s decision from the Reserve Bank comes as no surprise and it begs the question, how low can the cash rate go?”
Ms Mitchell encouraged borrowers and first home buyers to get into the market sooner rather than later.
“We will have to wait and see to what extent lenders pass the cut on to borrowers but the reality is, home loan interest rates have not been this low since the 1950s,” she said,
“And, with dwelling values in the major capitals starting to turnaround, now could be a great time for hopeful buyers to put their plans in action.”
There is renewed speculation another cash rate cut will occur sometime in the coming months, with calls for a cut as early as next month.
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:
- The big four banks are: ANZ, CBA, NAB and Westpac
- The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
- The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.
In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.
*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
- Passive income: How to make money while you sleep
- How would negative interest rates work in Australia?
- Open economy lays foundation for RBA cash rate cut
- Afterpay teams up with Westpac to offer savings account
- HomeBuilder 'highly effective' despite hodgepodge construction sector