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Are the days of dropping interest rates numbered?

At the June Board meeting today, the Reserve Bank of Australia decided to leave the official cash rate on hold at 2%. Given how frequently the Reserve Bank of Australia has moved the official cash rate in the past, the Board’s decision is largely unsurprising.


At the June Board meeting today, the Reserve Bank of Australia decided to leave the official cash rate on hold at 2%. Given how frequently the Reserve Bank of Australia has moved the official cash rate in the past, the Board's decision is largely unsurprising.

Generally speaking, the Reserve Bank like to see what impact each rate cut has on the economy. Given the drop to 2% last month, the RBA have chosen to leave rates on hold and watch the market closely to see impact of May's cut.  

At present, it is still too early to tell what effect the May rate cut has had on the domestic economy. It will take another month or so before the RBA sees what impact the last rate cut has on employment, inflation, business confidence and sentiment. At the moment, business confidence is relatively low by historical standards and inflation remains weak.

Consumer sentiment is the only area that has seen a significant upswing over the last month, with the Westpac Melbourne Institute Index of Consumer Sentiment showing confidence rose by 6.4% to 102.4.

This jump in sentiment marks the first time since February that the Index has been above 100 - the point which optimists outnumber pessimists. Of course, this sudden spike could largely be attributed to this year's ‘friendly' Federal Budget.

Moving forward, the Reserve Bank will likely keep a close eye on business sentiment, employment and inflation levels in a bid to understand what impact the May rate cut had (if any) on Australia's economy.

While further rate cuts cannot be ruled out in the future, the reality is the cash rate is now sitting at levels not seen for many, many years. As such, the question must be posed: how low can the cash rate go?

Have we reached the bottom of the rate cycle, or will we see the Reserve Bank trim the cash rate again at least once more before the end of the year?

Unfortunately, at this point in time, what the Reserve Bank will do with rates is anyone's guess.

But while the future of the cash rate is unknown, one thing is certain: the property market has a steady supply of stock and lenders continue to offer very competitive deals for home loan borrowers making finance for owning a home more affordable than ever.

For those with a mortgage, now is a great time to review your options. Rates are not only low, but Australia's lenders are actively competing for business (especially owner occupier business). So, if you have been in the same product for a while it may be worth re-evaluating your current mortgage situation and seeing whether or not there is a better deal available.

At Mortgage Choice, we can give your home loan a free home loan heath check, to make sure you are still in the right product for your needs - so what have you got to lose? 

Posted in: Interest rates

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