A less than impressive inflation result combined with a drop in consumer sentiment and the continued economic fallout associated with England’s decision to leave the European Union, has encouraged the Reserve Bank to cut the official cash rate.
Today’s decision means the cash rate has been reduced to the all-time low of just 1.5%. Speaking about its decision to cut the cash rate for the second time this year, the Reserve Bank of Australia said the timing was right and the current market conditions warranted another rate cut.
Data from the Westpac Melbourne Institute of Consumer Sentiment found confidence dropped 3% in July to the point where pessimists outnumbered optimists. This drop in confidence can be attributed to both the prolonged period of uncertainty following the recent Federal election, and the fallout of England’s decision to leave the European Union. People are cautious about the future, which is something the Reserve Bank was and is acutely aware of.
The weak inflation result would have also encouraged the Reserve Bank to re-think its stance on monetary policy. Data from the Australian Bureau of Statistics found consumer prices increased by 0.4% for the June quarter, taking the annual inflation result to just 1%. While this result was largely in-line with market expectations, the annual inflation result was not only below the Reserve Bank’s target band range, but it was actually the weakest annual rise since 1999.
With that said, it is clear why the Reserve Bank of Australia chose to cut the cash rate at its Board meeting earlier today. Looking ahead, all eyes will now be on Australia’s banks to see if they choose to pass on the rate cut in full to customers.
If Australia’s lenders do choose to pass on the rate cut in full, it will take home loan interest rates to new lows and make the cost of borrowing more affordable than ever before. But while many Australians will undoubtedly be waiting to see if their lender passes on some or all of today’s 25 basis point rate cut, it is important for potential and existing mortgage holders to be patient.
As we saw in May, not all of the lenders were quick to pass on the Reserve Bank’s rate cut. Further, when Australia’s lenders did announce their rate plans, many indicated that their rate cut wouldn’t come into effect until several weeks after the Board meeting. Knowing this, it is important for borrowers to be patient and give their lender at least a month to pass on the rate cut. If, following this time, their lender still hasn’t moved on rates, it might be worth shopping around for a better deal.
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