The Reserve Bank of Australia’s (RBA) decision this month to cut the official cash rate to 2.75% takes it to a record low since reporting began in the 1990s. The announcement should provide much needed relief for many Australian households and boost activity in the property and retail sectors. However, it is important to make the most of the potential savings.
The RBA takes many factors into consideration when deciding whether to cut the cash rate, but this month’s decision was very likely influenced by the unexpected rise in unemployment, from 5.4% in February to 5.6% in March.
There is no doubt that the labour market is subdued, and many economists see this trend continuing. However, it is unlikely that the Reserve Bank acted to cut the cash rate on one month’s employment figures alone. There are a number of other factors at play in the decision.
Inflation has been sitting at the lower end of the Reserve Bank’s target band of two to three percent for some time, providing room to move the cash rate. At the same time, the high Australian dollar has affected our terms of trade and made things tough for exporters, and there is hesitation forming around the looming federal budget. Couple all that with recent reports of falling property values, and it appears the RBA took the opportunity to cut the cash rate to help stimulate the economy.
Vital to the economic recovery is consumer and business confidence. The Westpac Melbourne Institute Consumer Sentiment Index fell by 5.1% from March to April. It is hoped that the latest cash rate cut will turn this trend around and help drive Australians’ confidence up, along with already improving longer-term retail sales, auction clearance rates and private treaty sales, plus housing finance commitments.
Retailers will be rejoicing in the hope that the rate cut is passed on by lenders and helps to increase discretionary spending. However, for many mortgage holders, the cut will likely represent a real cost saving. If they are able to use the savings to contribute more to their loan, not only will they repay the debt sooner and build up more equity, but they will also have in place a good financial buffer for times of need.
Keep in mind it isn’t just retailers and mortgage holders who stand to benefit from the rate cut. Those considering getting into the property market may get the reassurance they need to make their move sooner rather than later.
You work hard for your money so you want to make sure it works hard for you when it comes to your home loan. Keep a close eye on how your lender responds to the cut.
If they pass on all or at the very least, majority of the cut, do yourself a favour and continue to make repayments at the pre-rate cut level. On the flipside, if you aren’t happy with the outcome, you should do your research and seriously consider your loan options.
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