The decision of the Reserve Bank of Australia (RBA) to reduce the cash rate to an all-time low of 1.75% delighted home owners and the stock market. It also caught the big banks off-guard – all had forecast no changes in interest rates in 2016. Three of the four major banks quickly passed-on the entire cut (0.25%) to variable rate mortgage holders (the exception was ANZ, who reduced their rates by only 0.19%). The reduction of 0.25% will reduce repayments on a $300,000 mortgage by $528 per year. So, what were the key economic factors that influenced the RBA’s decision :-
- First and foremost, inflation is very subdued and looks set to remain so. The Australian Bureau of Statistics reported that consumer prices fell by 0.2% in the first quarter of 2016, taking the annual rate to 1.3%. The RBA is tasked with maintaining inflation of 2.0-3.0%. Lower interest rates increase consumer spending power, which should raise prices in the medium term.
- The Australian economy is currently growing at around 2.8%. This is about the long-term trend rate – but it seems that the RBA believes the growth rate could be even better. This would be an impressive outcome, given the end of the mining construction boom.
What are the implications for home owners and property investors? Lower interest rates may help support demand for housing and, together with the budget decision to make no changes to negative gearing in the budget, may drive further demand from property investors.
Over the next few days, challenger banks will announce their new interest rates for owner-occupiers and investors. These should see rates well below 4.00% for home owners and close to 4.00% for investors. What a great time to chat to Mortgage Choice Boroondara to check that you are maximising your benefit from these amazing rates.