July 02, 2019
The Reserve Bank of Australia (RBA) has delivered another 25 basis point cut to the official cash rate, bringing the rate to a new historic low of 1.00%.
These two rate cuts could give the average Australian mortgage holder with a $545,000 home loan an approximate saving of $220 per month, if lenders pass on the cuts in full.
Mortgage Choice Chief Executive Officer Susan Mitchell said, “Governor Lowe had previously stated that a single reduction to the cash rate would not have provided sufficient stimulus to the economy and that a second rate cut would be warranted. Key economic data has driven the RBA Board to cut the cash rate for a second consecutive month today, cementing the RBA’s new stance on monetary policy.
“There was no doubt that a second rate cut was on the cards later this year, however data from the labour market and the national accounts drove the Board to deliver further monetary policy stimulus sooner, rather than later.
“When the Bank made the first cut in nearly three years last month, it spurred half of the lenders on our panel to pass on the savings in full to their borrowers. However, it remains to be seen whether they take the same approach this time around.
“The RBA has been paying close attention to developments in the labour market. Governor Lowe indicated last month that one of the driving factors behind the RBA’s decision to cut the cash rate was the spare capacity in the labour market - the difference between the unemployment rate and full employment.
“According to the Australian Bureau of Statistics (ABS), the underemployment rate, a key measure of slack in the labour market, shows that the number of Australians who are currently employed and not working their desired number of hours, is on the rise.
“Further, the seasonally adjusted unemployment rate was 5.2%, which is far off the RBA’s desired 4.50%. Monetary policy stimulus could support employment growth and wage growth in the near-term.
“Another factor which drove the Board to cut the cash rate again is the most recent Australian National Accounts for the March 2019 quarter. The ABS data revealed that the economy grew at the slowest pace since 2009 at 0.4%, lowering the annual growth rate to 1.8%.
“Monetary policy stimulus from the RBA, coupled with fiscal stimulus in the form of the Coalition’s $158 billion tax cut plan which could pass in parliament this week, will serve to boost economic growth going forward.
“Indeed, Governor Lowe has indicated the government could be doing more to help wind back spare capacity in the economy. He has called for more government infrastructure investment and economic reforms in order to encourage the creation of jobs, lift lacklustre wages and help bring inflation in line with target.
“It would appear that recent developments, such as the outcome of the federal election, and the removal of the threat to tax policy may be bolstering confidence in the housing market. The latest CoreLogic Hedonic Home Value Index revealed that national dwelling values were down 0.2% over June. Interestingly, both Sydney and Melbourne dwelling values improved month-on-month, growing 0.1% and 0.2% respectively. And, with APRA’s current consultation with lenders to reduce the serviceability buffer and floor potentially improving access to credit, there will be more good news on the horizon for the housing market” said Ms Mitchell.
Looking ahead, the RBA has not ruled out the possibility of further rate cuts, with Governor Lowe saying ‘...the possibility of lower interest rates remains on the table. It is not unrealistic to expect a further reduction in the cash rate as the Board seeks to wind back spare capacity in the economy and deliver inflation outcomes in line with the medium-term target.’
Ms Mitchell said, ““The reality is regardless of what the RBA decides going forward, I would encourage borrowers who have benefitted from the cash rate reductions to review their finances. This cash flow relief may present borrowers with opportunities to make additional home loan repayments, the potential to make extra contributions to their superannuation, or the potential to explore other investment opportunities to achieve their financial goals. Of course, it goes without saying that consumers should consult expert advice from their mortgage broker to help them with these decisions.
“Borrowers who did not benefit from last month’s rate cut should consider speaking to their mortgage broker to find out if there are more competitive home loan options available to them. There are many great deals to be had at the moment, which means now might be the right time to refinance your loan.
“Further, for those looking to take steps towards buying their first home, now is a fantastic time to take advantage of record low interest rates. I would encourage first time buyers to speak to their local mortgage broker to learn what their borrowing power is and what home loan options are available to them,” concluded Ms Mitchell.
