Reserve Bank Cuts Interest Rates to 1pc

The Reserve Bank of Australia has cut the cash rate by 25 basis points to a new historic low of 1 per cent.

The RBA’s decision to lower the cash rate marks the second interest rate cut in two months as RBA governor Philip Lowe says the central bank’s focus is on the nation’s economy and rising unemployment.

“Today's decision to lower the cash rate will help make further inroads into the spare capacity in the economy,” Lowe said.

“It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.”

How Lowe will we go?

The bank’s decision to lower interest rates to historic lows was anticipated by 21 out of 32 economists polled by Bloomberg.

Following Tuesday’s cut, Capital Economics thinks the bank will again slash interest rates to 0.5 per cent by early next year.

While AMP Chief Economist Shane Oliver says he expects rates will drop at least once more before year's end.

“We’ll see the next cut probably in November and then another cut coming early next year, which ultimately will take the cash down to an ultra record low of just 0.5 per cent,” Oliver said.

Corelogic research analyst Cameron Kusher says the RBA's decision is an attempt to support the economy, a move that has “very little to do with housing market conditions”.

“In fact, the ongoing slowing of the rate of decline in dwelling values throughout 2019 and the recent uptick in Sydney and Melbourne dwelling values, would likely have reduced concerns of further wealth erosion from housing.”

The economy

Over the year to the March quarter, the nation’s economy grew at a below-trend 1.8 per cent.

And while Lowe described the scenario for Australia’s economy as remaining “reasonable” with “growth around trend expected” he said consumption growth had been subdued dampened by a period of low income growth and declining housing prices.

“The main domestic uncertainty continues to be the outlook for consumption, although a pick-up in growth in household disposable income is expected to support spending,” Lowe said.

‘Major boost to housing affordability’

While the Reserve Bank’s motive to move may have little to do with the housing market, the latest cut will help affordability for home buyers... providing the banks pass it on.

Real Estate Institute of Australia president Adrian Kelly describes the second cut as “a major boost to housing affordability”.

“Subject to the banks passing on the cuts in full, this means that for each $100k borrowed annual payments decrease by $500,” Kelly said.

As for the big four...

ANZ bank said it will pass on the full 25 basis point rate cut to borrowers, but Commbank, Westpac and the National Australia Bank will not.

Instead, Commbank announced a 0.19 per cent rate cut for its principal and interest customers, but the full 0.25 percentage point for interest-only mortgage holders.

NAB announced cuts of 0.19 percentage points, and Westpac will pass on 0.20 per cent cut for owner occupier customers and a reduction of 0.35 per cent for customers with interest-only repayments.

The Reserve Bank’s back-to-back record cuts, combined with APRA’s recent moves on mortgage lending, are factors Kusher describes as “likely to to be further positives for the housing market” likely to encourage a “gradual levelling in the housing downturn nationally”.

National housing market data released this week reveals a 0.2 per cent fall in June, with Corelogic describing this as the smallest month-on-month decline since March last year.

The latest figures show Sydney dwelling values have dropped 14.9 per cent since peak, while Melbourne dwelling values have dropped 10.9 per cent since peak.

The peak-to-trough decline for the nation’s combined capital cities sits at 10.2 per cent.