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What an RBA interest rate cut ACTUALLY means

The Reserve Bank of Australia will make its official cash rate decision for June on 4 June. Images: Getty

The Reserve Bank of Australia will hold its monthly board meeting on Tuesday 4 June to decide whether it will keep interest rates on hold for another month, or - as is widely expected - cut rates to a record low.

A cut of 25 basis points tomorrow would bring the official cash rate down to 1.25 per cent and most analysts believe lenders will pass on at least some of the interest rate cut.

Why does the Reserve Bank cut interest rates?

To boost a struggling economy.

The central bank cuts rates to boost the economy, so an interest rate cut is generally considered a marker of economic weakness.

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.”

How does a rate cut translate to a lower home loan rate?

Banks themselves receive a lower interest rate when they borrow from the Reserve Bank.

Banks are inclined to follow the Reserve Bank’s decision because the cash rate is the rate at which the Reserve Bank lends to other banks.

But if you’re on a fixed rate, you can look away now. A Reserve Bank interest rate cut will usually see benefits flow through to variable rate loan customers, while savers and those with term deposits will be stung with lower interest rates. Fixed interest borrowers will see little direct benefit.

When it comes to variable rate homeowners, however, banks generally pass on at least some of the rate cut, although Finder.com.au analysis has found lenders tend to drag their feet, choosing to cut rates on term deposits and savings accounts before they do so on home loans.

Will I receive a rate cut?

Probably, but it’s difficult to say how much.

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

How much is the million-dollar question.

“Despite the likely political and social pressure on the banks to reduce their lending rates in such a scenario, it is unclear in our view if the banks would do that--and, if so, to what extent,” S&P Global Ratings said today.

“We believe that the Australian banks have limited flexibility to further reduce their lending rates without taking a hit on their interest margins, because a cut in the official cash rate will only have partial impact on the banks' own borrowing costs.”

“Furthermore, the Australian banks have shown a good track record of preserving their margins.”

The Reserve Bank of Australia will announce its interest rate decision for June on Tuesday 4 June 2019 at 2:30pm.

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