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BREAKING: Reserve Bank SLASHES the cash rate to a new record low

Samantha Menzies
Senior editor – Finance
RBA cuts rates for the first time since August 2016. Source: Getty Images

The Reserve Bank has cut interest rates by 25 basis points to a new record low of 1.25 per cent in what is the first movement in cash rates since August 2016.

The announcement comes as no surprise, with the majority of experts and economists expecting the Reserve Bank would make its first move in nearly three years just weeks after the Federal Election on 18th May.

What the RBA cash rate cut means for your mortgage...

Although there’s no guarantee lenders will pass on the savings from the rate cut to mortgage holders, if they do it could mean some extra room in Aussie budgets.

If you’re on a fixed rate, not a lot will change. If you have a variable home loan, then it’s likely you’ll feel some relief from your mortgage repayments.

How much is the million-dollar question.

Here’s how much Aussies will save on their home loan repayments, based on the average home loan rate:

Impact of the 0.25% rate cut on average home loan rates. Source: RateCity

Now that a rate cut has happened, there will be pressure on the banks to pass it on in full. Although not one of the big four CEOs have indicated that they would pass on the rate cut in full.

“Banks have been hiking rates since 2017 due to the high cost of funding, but this pressure has dissipated,” RateCity’s research director Sally Tindall said.

So the RBA cut should, in theory, be passed on in full.

“That said, it’s been a tough year for the banks in a slowing home loan market, so some lenders may choose to hold part of the cut back,” she said.

Yahoo Finance contributor Stephen Koukoulas agrees.

“Mortgage interest rates are set to fall, by something close to or at the 25 basis points. Bank's cost of funds has been falling because of low interest rates in global capital markets so there will be no excuse for them to pass it on,” he said.

What the RBA cash rate cut means for your variable home loan...

Your variable home loan rate will reduce.

Mortgage Choice’s chief executive officer, Susan Mitchell said should the RBA cut the official cash rate, she expects to see at least some of that rate reduction passed on to borrowers

But, if recent history is anything to go by, the last time the RBA cut the rate, few lenders passed the full rate adjustment on to borrowers.

“That being said, some lenders are already reducing their variable rates, in anticipation of a drop in the official rate,” she said.

For example, here’s how much you will save on Australia’s average $400,000 variable rate home loan (over 30 years) now the RBA has cut rates:

The annual and monthly savings on a $400,000 variable rate home loan (over 30 years). Source: Finder

What the RBA cash rate cut means for the economy...

Australia has needed an interest rate cut for some time in order to boost our struggling economy.

A rate cut has the potential to stimulate consumer sentiment and stem further falls in house prices, S&P Global Ratings said in a note today.

But as CoreLogic analyst Tim Lawless also noted, an interest rate cut may be good news for homeowners but is a broader sign of economic concerns.

“Policy makers are becoming increasingly concerned about prospects for economic growth and stubbornly low inflation. The labour market is seeing some cracks emerge and global trade tensions remain high.

“If the economy continues to lose momentum, we could see further weakening in labour markets and a continuation of weak wages growth.”

What the RBA cash rate cut means for the Australian dollar...

Traditionally, when interest rates are cut, the dollar takes a hit as generally, rising interest rates indicate a strengthening economy which would raise the value of a currency.

An interest rate cut implies the opposite.

However, this time around the impact of the RBA’s cash rate announcement on the Aussie dollar will be slight, Koukoulas explains.

“It [the cut] was largely anticipated by financial markets although, dare I say it, there will be speculation about when the next rate cut will be,” he said.

But it is worth noting that commodity prices are starting to weaken which could be more important and negative for the Aussie dollar than lower interest rates, he added.

“Don't forget, the US Federal Reserve is also likely to be cutting its interest rates before the end of the year,” Koukoulas said.

As at 1pm today, the Australian dollar was trading at 0.6972 against the US dollar.

What the RBA cash rate cut means for property prices...

Historically, interest rate cuts have pushed property values up as borrowers have found it easier to access finance at lower interest rates. Borrowers’ buying power is subsequently boosted.

Recent RBA research found interest rates to be a key driver of Sydney and Melbourne’s property growth, pointing to a one percentage point (100 basis point) reduction in interest rates leading to a corresponding 8 per cent increase in property prices over the following two years.

But that depends on whether lenders choose to pass on all or some of the rate cut.

What the RBA cash rate cut means for property sellers...

rate cut generally makes it easier to sell a property as more borrowers have finance, and they are also able to spend more.

“[During the downturn] we saw a lot of people switch from auction to private sale but I do think those auction numbers are going to increase and that’s primarily because there will be more buyers out there and there's going to be more competition for homes,” chief economist at realestate.com.au, Nerida Conisbee told Yahoo Finance.

What the RBA cash rate cut means for property buyers...

If you’re buying property, you should be able to borrow more.

But, Conisbee cautioned, just because you can doesn’t mean you should.

“Buyers do need to be very careful that when they’re taking out a loan that they don't assume that rates will stay at this record low level,” she said.

“You've got to remember that if we do see a cut it will be the lowest we've seen, so although people can borrow more, they just need to be a little bit mindful that rates can go up. You need to have a buffer there.”

What the RBA cash rate cut means for property investors...

A rate cut should serve as a reminder to investors to be mindful of the rent they can realistically expect from renters.

“Even though the banks may lend you more money, you do need to think about if the house is going to provide a decent yield and what's the outlook for capital growth,” Conisbee explained.

“Although the market seems to have bottomed out now, it seems unlikely that we'll get to double digit price growth again, so investors do need to be mindful that they won't get to the same sort of capital growth that they did when things were red-hot previously.”

She said attracting a tenant is critical, so investors should take care to consider the market forces when discussing rental rates with prospective tenants.

What the RBA cash rate cut means for savers...

You’ll see less monthly interest coming through your savings bank account every month.

The interest rate is determined by your bank, which is influenced by the Reserve Bank’s decision. If the RBA moves, the banks often follow suit.

However, interest rates are already so low that you won’t notice a huge difference.

But if you’ve got a lot of money in savings, and will notice a small change in interest rates, the advice is to shop around.

What the RBA cash rate cut means if you’re a self-funded retiree…

If your main source of income comes from the interest you get on your savings, you’ll be stung by the RBA’s move.

“[The rate cut is] really going to have more of an impact if you’ve got $100,000 invested in the bank, and you’re relying on that interest income to live on,” AMP Capital chief economist Shane Oliver told Yahoo Finance.

What the RBA cash rate cut means for small business owners…

On the whole, a lower cash rate is good news if you run a business.

On the one hand, since business owners have savings accounts just like everyone else, small businesses often have more debt than money in their bank deposits, Oliver pointed out.

Not only that, but since the lowered interest rate is designed to encourage more consumer spending, businesses will be the direct beneficiary of Aussies feeling more willing to open up their wallets.

What the RBA cash rate cut means if you own shares…

Historically, share markets tend to react positively to RBA rate cuts, so if you’re invested in stocks, a rate cut should be good news for you, said Gerrard.

“In addition to lower corporate borrowing rates and improved consumer confidence, more people move from cash into shares, chasing higher income returns which pushes the market higher.”

What the RBA cash rate cut means if you’re about to go overseas for a holiday…

When the Reserve Bank cuts rates, the aim is to inject extra cash into the economy by giving mortgage holders extra cash in their pockets. But it’s also to force the Australian dollar lower and thus boost our export income.

So a cash rate cut generally pushes the Aussie dollar lower, meaning you’ll get less bang for your buck when you convert your money.

“The good news is that the rate cut is largely expected so the impact on exchange rates should be relatively minor,” Gerrard said.

What the RBA cash rate cut means for the Coalition...

For the newly elected Coalition, it should be a wake up call that the economy is far from strong, Koukoulas told Yahoo Finance.

“Indeed, it is weak,” he said.

“If the economy remains weak and the unemployment rate keeps rising, the government may have to look at extra spending to avoid a hard landing - i.e., a recession.”

Philip Lowe, Governor: Monetary Policy Decision

“At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.25 per cent. The Board took this decision to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.”

“The outlook for the global economy remains reasonable, although the downside risks stemming from the trade disputes have increased. Growth in international trade remains weak and the increased uncertainty is affecting investment intentions in a number of countries. In China, the authorities have taken steps to support the economy, while addressing risks in the financial system. In most advanced economies, inflation remains subdued, unemployment rates are low and wages growth has picked up.

“Global financial conditions remain accommodative. Long-term bond yields and risk premiums are low. In Australia, long-term bond yields are at historically low levels. Bank funding costs have also declined further, with money-market spreads having fully reversed the increases that took place last year. The Australian dollar has depreciated a little over the past few months and is at the low end of its narrow range of recent times.

“The central scenario remains for the Australian economy to grow by around 2¾ per cent in 2019 and 2020. This outlook is supported by increased investment in infrastructure and a pick-up in activity in the resources sector, partly in response to an increase in the prices of Australia's exports. 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.

“Employment growth has been strong over the past year, labour force participation has been increasing, the vacancy rate remains high and there are reports of skills shortages in some areas. Despite these developments, there has been little further inroads into the spare capacity in the labour market of late. The unemployment rate had been steady at around 5 per cent for some months, but ticked up to 5.2 per cent in April. The strong employment growth over the past year or so has led to a pick-up in wages growth in the private sector, although overall wages growth remains low. A further gradual lift in wages growth is expected and this would be a welcome development. Taken together, these labour market outcomes suggest that the Australian economy can sustain a lower rate of unemployment.

“The recent inflation outcomes have been lower than expected and suggest subdued inflationary pressures across much of the economy. Inflation is still however anticipated to pick up, and will be boosted in the June quarter by increases in petrol prices. The central scenario remains for underlying inflation to be 1¾ per cent this year, 2 per cent in 2020 and a little higher after that.

“The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities. Conditions remain soft, although in some markets the rate of price decline has slowed and auction clearance rates have increased. Growth in housing credit has also stabilised recently. Credit conditions have been tightened and the demand for credit by investors has been subdued for some time. Mortgage rates remain low and there is strong competition for borrowers of high credit quality.

“Today's decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time.”

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