RBA cuts cash rate to 0.50%

Photo by José Martín Ramírez C on Unsplash

The Reserve Bank has decided to cut the official cash rate by 25 basis points to 0.50% in its board meeting today.

Today's cut is the first since October, following holds in November, December and February. 

The RBA had been expected to hold the cash rate steady again today until recently, when fears over coronavirus and the resulting economic fallout priced a March rate cut as a near certainty. 

A recent OECD report, for example, said the virus could slash half a percentage point (about $10 billion) from Australia's annual economic output. 

Market pricing for a 25 basis point cut from the RBA increased from 18% at close of business on Friday 28 February to 100% as at yesterday morning. 

The market is now expecting the #RBA to use the remainder of its conventional policy immediately - it may well do so, in particular if nothing is forthcoming from other policy makers in a timely manner... #ausbiz pic.twitter.com/M0zhJlbxXa

— Alex Joiner (@IFM_Economist) March 1, 2020

Prior to this, the next rate cut was expected to occur in April at the earliest. 

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RBA Governor Philip Lowe's statement was chock-full of coronavirus references justifying the cut. 

"The coronavirus has clouded the near-term outlook for the global economy and means that global growth in the first half of 2020 will be lower than earlier expected," Dr Lowe said. 

"It is too early to tell how persistent the effects of the coronavirus will be and at what point the global economy will return to an improving path.

"The coronavirus outbreak overseas is having a significant effect on the Australian economy at present, particularly in the education and travel sectors. The uncertainty that it is creating is also likely to affect domestic spending.

"As a result, GDP growth in the March quarter is likely to be noticeably weaker than earlier expected."

Mr Lowe also said the board was prepared to ease monetary policy further, further fueling speculation of another rate cut soon. 

"The global outbreak of the coronavirus is expected to delay progress in Australia towards full employment and the inflation target," he said. 

"The Board therefore judged that it was appropriate to ease monetary policy further to provide additional support to employment and economic activity.

"It will continue to monitor developments closely and to assess the implications of the coronavirus for the economy."

The RBA has previously hinted it would consider implementing Quantitative Easing (QE) should the cash rate reach 0.25%. 

The next rate cut, should it be 25 basis points again, would take our cash rate to this level. 

Lenders unlikely to pass on full rate cuts

CoreLogic head of research Tim Lawless said there is less certainty this latest rate cut will add fuel to the housing market in the current economic climate.

“This is partly because the latest rate cut is unlikely to be fully passed on to mortgage rates,” Mr Lawless said.

“Furthermore, a low cash rate coupled with concerns around the global spread of coronavirus, has the potential to spook consumers and drag confidence lower. 

“Buying or selling a home is a high commitment decision; if consumer confidence slips further from already low levels, we could see Australian households sit on their hands rather than decide to buy or sell, which would weigh on market activity.”

Mortgage Choice CEO Susan Mitchell also said it was unlikely borrowers would see full rate cuts. 

Having said that, it has just been announced that one of Australia's major banks Westpac will pass on the full rate cut for home loan customers, something they hadn't done following previous rate cuts. 

"However a record low cash rate means a sustained period of low interest rates will continue to stimulate the housing market, worsening housing affordability in the nation’s largest markets, Sydney and Melbourne," Ms Mitchell said. 

“The current low rate environment makes now an ideal time for those looking to enter the property market to put their plans in action."

Prushka Fast Debt Recovery CEO Roger Mendelson meanwhile said this rate cut will not stimulate consumer spending as intended, and will only fuel the rise in house prices already seen in major cities.

“Homeowners should take advantage of this opportunity to pay off their debts at a higher rate, by maintaining their monthly payments,” he said.

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