Reserve Bank of Australia delivers interest rate cut to 1.25%

June 4th has brought an end to the 30-month stalemate as the Reserve Bank of Australia (RBA) slashed the cash rate by 25 basis points to 1.25%. In a move to support employment growth and provide greater economic confidence in the medium-term inflation target, the national cash rate was reduced for the first time since August 2016. This action is in line with recent predictions as was forecast by Westpac from February, although this initial cut comes a few months earlier than initially expected.

In a statement, RBA Governor Phillip Lowe confirms the outlook for the global economy remains reasonable, with predicted growth for the Australian economy sitting at 2.75% over the next two years.

“The main domestic uncertainty continues to be the outlook for household consumption, which is being affected by a protracted period of low income growth and declining housing prices. Some pick-up in growth in household disposable income is expected and this should support consumption,” he said.

The RBA also confirm that adjustments in the established housing market are continuing and conditions remain soft despite an increase in auction clearance rates in some state markets, and a slow-down of price decline.

A secondary cut of an additional 25 points (down to 1%) is anticipated as early as August and definitely before the end of the year. The RBA has also proposed changes to mortgage loans serviceability requirements, including possibly abolishing the existing 7% interest rate floor. This would see lenders calculating loans using a 2.5% buffer above the current mortgage interest rate, instead of being calculated at whichever is higher, 7% or a 2% buffer.

As a result of the latest cut, all eyes have turned to mortgage rates to see if they follow suit, in lieu of a warning from Lowe that there is “no excuse” for banks who do not lower their mortgage rates by the full 25 basis points. ANZ was the first of the Big Banks to act but did not pass on the full cut, reducing the standard mortgage rate by only 0.18 percentage point. Commonweath Bank and NAB both passed on the interest rate cut in its entirety, reducing variable loan rates by 0.25 percent. Finally, Westpac announced a decrease of only 0.20 percentage points — still not the full amount.

Written: 4 June 2019

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