RBA Cuts Interest Rate to Record Low
On 4 June, the Reserve Bank of Australia (RBA) announced its decision to lower the cash rate by 25 basis points to 1.25%. After 30 consecutive holds in the interest rate at 1.5%, the federal bank took this decision to “support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.”
Australia has not had economic contraction since the first half of 1991 and was well insulated from a global crisis. The country has managed to minimize the effect of the Asian Financial Crisis in 1997, and the Global Financial Crisis in 2009. However, it is hard to say if the Australian financial system can be resilient in the wake of the latest world crisis; the trade battle between China and America.
The interest rate cut came amid the looming indication of an economic slowdown. The world trade war between the two economic superpowers had managed to send a shockwave across the world, sending investors running to withdraw their funds from the equity market. Subsequently, global uncertainty has led to a loss in consumer confidence. Economic data has shown that the Australian economy is slowing down. These factors had foreshadowed an impending deflation in the Australian economy.
According to the RBA, they said the outlook for the global economy “remains reasonable.” In Australia, they predicted the economy will grow by around “2.75%” in 2019 and 2020, which is supported by “increased investment in infrastructure and a pick-up in activity in the resources sector.” The recent inflation data had fallen short of expectation but the central bank anticipated it will increase due to “increases in petrol prices”. In the housing markets, after the Royal Commission revelation, credit conditions have “tightened” and house prices had been falling. RBA believed their decision to lower the cash rate will “help make further inroads into the spare capacity in the economy”, “reduce unemployment”, and achieve the “inflation target”.
In the lead up to the rate cut, Treasurer Josh Frydenberg and Governor Philip Lowe had firmly indicated that the banks should pass on the interest rate cut into variable mortgage rates. Governor Lowe said “this reduction in the cash rate should be fully passed through to variable mortgage rates.” However, of the big four banks, CBA and NAB were able to pass on the rate cut in full to borrowers. ANZ and Westpac passed on 18 basis points and 20 basis points respectively. The Treasurer criticised that “the ANZ has let down its customers” and that “this is deeply disappointing from the ANZ.”
Winners and losers amid rate cut
Like all other games, when a game finishes, some will win and some will lose. The result of an interest rate cut will be advantageous for some and disadvantageous for others. However, analysts had considered the rate cut to be widely beneficial for Australia, given how indebted the country is.
Upon investigation, the discovery of misconduct in the banking sector had significantly affected the housing markets. Conditions for the housing markets prices became soft as a result of a protracted period of price drop and tighter housing credit. In light of this, the rate cut is expected to stabilise the house prices in the market. Thus, real estate agents will likely benefit from the reduced interest rate. Furthermore, property owners will benefit if house prices start to improve.
Lower cash rates suggest that people with a mortgage will have smaller interest rate payment. This will help stimulate the economy as these people will have more money to consume. In addition, businesses may benefit from the lower cost of borrowing. This will encourage investment which will drive economic growth.
The Australian dollar is likely to be lower from the rate cut as foreign investors will find countries with a higher interest rate. This will see a drop in demand and in turn, the Australian dollar will be lower. Australian exporters such as farmers and miners will be advantageous by this result as they sell their goods in foreign currency and receive Australian dollars.
While the cost of borrowing will decrease from the rate cut, house prices may start to stabilise. First home buyers may need to act quickly before the effect on the house prices starts to kick in. Furthermore, with the Royal Commission, the tighter credit condition may hinder the ability for some of these buyers to take out a loan.
People who are relying on the interest income from their savings accounts will be negatively impacted by the decreased interest rate. Though this should be the minority of the people as workers should have superannuation and other investments such as shares and property.
Uncertainty looms in the Australian economy
The cash rate cut was already foreshadowed by the RBA in the previous weeks. In yesterday’s announcement, The RBA had strongly indicated that interest rate could experience another cut later this year. “The answer here is that the board has not yet made a decision, but it is not unreasonable to expect a lower cash rate,” Governor Lowe said. Many analysts had already predicted another rate cut will be inevitable by 2020, with some forecasting three or even four reductions.
By Jack Lee
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