Record low rates are fuelling household debt.
THE Reserve Bank has shrugged off Brexit fears to leave the official cash rate on hold at its historic low of 1.75 per cent, but most experts are tipping a cut next month.
As widely expected, the RBA opted to leave rates on hold at its July meeting, with Australia still in political limbo as the country awaits the outcome of Saturday’s inconclusive election cliffhanger.
“Financial markets have been volatile recently as investors have re-priced assets after the UK referendum,” RBA Governor Glenn Stevens said.
“Any effects of the referendum outcome on global economic activity remain to be seen and, outside the effects on the UK economy itself, may be hard to discern.”
The central bank last moved in May with a shock Federal Budget day cut of 25 basis points, citing weak inflation data, after 12 months leaving rates on hold.
According to a survey of 30 economists by comparison website Finder.com.au, two thirds are expecting a rate cut next month following the release of the June quarter inflation data.
A smaller number are tipping the next cut will be in November.
“The RBA expressed comfort with current monetary settings after the June meeting and it’s likely in wait-and-see mode regarding the risks posed by Brexit,” AMP Capital chief economist Dr Shane Oliver said in the survey.
CommSec economist Savanth Sebastian said the RBA would want to look through the current share market volatility and wait on the June quarter inflation data.
Independent economist Saul Eslake said the outlook for the economy hadn’t changed materially since last month’s meeting.
“[The] Brexit vote does cast a shadow, but it is too early to tell whether that shadow will last long enough and be dark enough to warrant a monetary policy response,” he said. “The RBA is likely to wait for June quarter CPI before reconsidering.”
Finder spokeswoman Bessie Hassan warned borrowers to avoid getting in over their heads. “Australia’s average household debt is four times what it was 27 years ago, currently standing at $245,000 per household,” she said.
“The Great Australian Dream is alive and well, particularly in a low-interest rate setting, but with property prices increasing, household debt is becoming a real burden. Households must plan for future financial shocks.”
Borrowers should factor in a buffer of 2 to 3 per cent above their current interest rate so they are able to continue servicing their loan in the event of future rate hikes.