Economic Insights 5 May 15: RBA cuts cash rate to record low of 2 percent1:31
The Reserve Bank of Australia has eased the cash rate by 0.25 percent to an all-time low of 2 percent.. The Central Bank has not given any guidance on future rate moves.
The Reserve Bank has ignored concerns about an overheating property market.
THE Reserve Bank has cut the official interest rate to a historic low of 2.0 per cent in a move likely to throw further fuel on the overheated housing market.
And while borrowers are being urged to keep their monthly repayments the same, Treasurer Joe Hockey has urged Australians to borrow more and invest in the economy.
Speaking to reporters in Canberra, Mr Hockey said the cut would “put fertiliser” on green shoots in the Australian economy. “It will help to further stimulate economic growth and stimulate more jobs,” he said.
“There are many green shoots in the Australian economy, this interest rate cut will help facilitate these green shoots. It’s as much about putting fertiliser on those green shoots as anything else.
“I say to the Australian people directly, now is the time to borrow and invest whether you’re a household or small business, now is the time to have a go to borrow some money and to invest. Invest in the things that help to create jobs.”
Mr Hockey said the budget next week would show fiscal and monetary policy were working together. “You will see everything we’re doing is going to plan. It is important that we have the right budget, and we will.”
ANZ is the first of the big banks to pass on the rate cut. But experts have warned people to be cautious about over-extending themselves.
Peter Arnold from RateCity said people were “getting next to nothing” on savings accounts and therefore would look towards other forms of investment.
“People need to be careful what they invest in,” Mr Arnold said. “High yielding investments come with higher risks.”
Sam White from Loan Market said while there are fears the cut could push property prices in areas such as Sydney over the $1 million mark, it could also accelerate the introduction of stronger macroprudential measures in a bid to slow it down.
“If the Sydney market keeps moving, the issue of affordability must be addressed. I think the regulators will be eager to find measures to slow things down,” he said.
“Talks around limits on negative gearing, self-managed super fund investment and foreign investment could all be on the table.”
Treasurer Joe Hockey holding a press conference at Parliament House in Canberra. pic By Kym SmithSource:News Corp Australia
Having seen significant growth in Sydney since the RBA’s last cut in February, Mr White believes today’s decision will further increase energy in the Sydney real estate market.
“It’s in no-one’s best interests for the market to become unaffordable or unsustainable. If we see another spike in activity, it will force regulators to make tough decisions around measures to slow it down.
“My desire is to see a stable property market, which offers long-term value and gives confidence to homeowners and investors,” he said.
Shadow Treasurer Chris Bowen said the move was a sign that the Reserve Bank was “catching a falling Australian economy where the government is not”.
“When he was Shadow Treasurer, Joe Hockey called interest rates higher than this ‘emergency levels’,” he told reporters. “This government is in chaos and dysfunction.
“For months the Reserve Bank has been saying that the conditions are there for economic growth but that business and consumers lack confidence. With the economy in transition, confidence is more important than ever before – confidence which this Treasurer by his words and actions has killed.
“Joe Hockey is to confidence what a wooden stake is to a vampire.”
Today’s cut by the RBA follows its surprise decision to leave rates on hold at 2.25 per cent in April.
The last change was in February when the cash rate moved from 2.5 per cent to 2.25 per cent, and economists had warned another rate cut was on the way following last month’s close decision.
According to comparison website Mozo.com.au, a 25 basis point cut would take the lowest variable home loan rate of 4.23 per cent down to 3.98 per cent. On a $300,000 mortgage, a 25 basis point cut would decrease the average monthly repayment by $44, from $1,742 down to $1,698.
If homeowners were to ignore the rate cut and keep repayments the same, the average homeowner would save $11,160 in interest and pay their mortgage off 13 months sooner.
AMP Capital chief economist Dr Shane Oliver said the RBA’s case for a cut was strong given weak business investment outlook, falling commodity prices and a still too-high Australian dollar.
“It’s in no-one’s best interests for the market to become unaffordable or unsustainable.” Pictured: Damien Cooley (auctioneer).Source:News Corp Australia
While there was some speculation the RBA would keep rates on hold due to fears of fuelling bubble-like conditions in the Sydney housing market, Dr Oliver said the central bank had largely passed on the baton of slowing property investment to the Australian Prudential Regulation Authority.
“The Reserve Bank was worried that bubble-like conditions could inflate further and that could result in financial instability down the track,” he said. “But it’s dangerous to set monetary policy based on one city.”
The cut will be welcomed by Australians with home loans, personal loans and credit card debt, but self-funded retirees relying on interest from bank deposits may feel the pinch. “Australians owe the banks about $2 trillion in loans, while there are about $800 billion worth of bank deposits,” Dr Oliver said. “Obviously one swamps the other.”
The record-low cash rate was a sign that the economy was still in trouble, Dr Oliver said. “The clear message is the economy is still not performing as well as it should and needs a bit of help in the rebalancing process. Growth is still running below trend, and the period for below-trend growth keeps getting pushed out.”
Lower interest rates should help drive down the value of the dollar, giving a much-needed boost to industries like tourism, manufacturing, agriculture and higher education.
The currency dropped from 78.54 US cents to 77.95 US cents shortly after the RBA’s decision was announced at 1430 AEST, but quickly rebounded to 78.83 US cents.
The rebound appears to be linked to the lack of any interest rate outlook in the statement accompanying the decision, which economists have taken as a signal that the central bank may be unwilling to cut further.
Peter White, chief executive of the Finance Brokers Association of Australia, said borrowers should ignore any rate cut and try to keep their monthly repayments the same.
“You can wind up in a falsified economy thinking [low interest rates] are going to be sustainable,” he said. “It’s only a matter of time before rates start to kick up again, either in the later part of this year or the first half of next year. Try not to use this as a reason to borrow more — use it as an opportunity to pay off your loan quicker.”
Michelle Hutchison, money expert with comparison website Finder.com.au, said experts surveyed were expecting rates to start rising as early as February next year. “If you’re not preparing now for higher costs, you could end up in financial trouble from next year,” she said.
“Our survey shows the cash rate is expected to rise to 4 per cent, which means variable home loan interest rates will hit an average peak of 7.1 per cent. For an average $300,000 home loan, that’s an extra $341 in repayments per month.”
Borrowers should prepare by comparing home loans, asking their lender for a discount, switching to a cheaper deal and making fortnightly or weekly payments rather than monthly, she said.