It’s looking increasingly likely that the Reserve Bank of Australia (RBA) will cut the official cash rate to a record low of 0.1 per cent when it makes its rate decision on 2 November.
RBA Governor Philip Lowe said while earlier in the pandemic the bank thought there was “little to be gained” from further monetary policy, they’ve since come around.
“As the economy opens up, though, it is reasonable to expect that further monetary easing would get more traction than was the case earlier,” Lowe told the Citi Australia and New Zealand Investment Conference last week.
So what changes can we expect when the official cash rate dips from 0.25 per cent to 0.1 per cent?
Home loan rates lowered
AMP chief economist Shane Oliver told Yahoo Finance that it’s likely the major banks will pass a rate cut on, meaning home owners will see some relief.
“The Reserve Bank is providing so much assistance to the banks with cheap financing, so there will be a lot of pressure on the banks to pass it on,” Oliver said.
“It also has to be said in the context of more bond buying by the RBA. The combination of the two will see... variable rates will come down, and as bond yields are pushed lower, that will push down fixed loans as well.”
Savings rates could go backwards
If the banks pass on the cut to mortgage rates, they may pass on the rate cut to savings accounts. In some instances, that could see savings rates turn negative – which means Aussies would actually pay the bank to keep their cash.
“Some cash management funds are already close or at zero, like old-fashioned chequing accounts,” Oliver said.
But it’s not really something Aussies need to worry about, he indicated.
“Would the banks cut to negative? I’d think probably not, I’d think the banks would be afraid of losing depositors if they go negative, particularly given they are getting cheap funding from the Reserve Bank.”
Some central banks in Europe and Japan have negative interest rates, which has led to deposit rates in those countries also going negative.
In saying that, the RBA has said it is “extraordinarily unlikely” that it will take interest rates negative on repeated occasions.
Stock market won’t move much
We’re unlikely to see much movement in the stock market resulting solely from the cash rate cut, because the stock market has already factored it in, Oliver said.
“The market came around to the view that a rate cut was imminent a few weeks ago, when we had various communications out of the Reserve Bank, particularly one by Governor Lowe several weeks ago,” Oliver said.
“I think the market from that point on started to factor in the likelihood of another interest rate cut, and at the time that pushed the Aussie market up to its highest level since early March.”
There could still be a “marginal” positive reaction on the share market, particularly to consumer stocks.
Australian dollar will stay low
Cutting the cash rate another 0.15 per cent and engaging in quantitative easing – buying back bonds – will keep the Australian dollar lower than what might otherwise be the case.
“This is a positive for the economy, because it helps exports become more competitive internationally, and it makes imports become a little less attractive,” Oliver said.
It won’t stop the Aussie dollar rising altogether, though: “If the world economy recovers, the Aussie dollar will go up, it just won’t go up as much.”
Usually a drop in the Aussie dollar impacts our spending overseas, but with international borders shut due to Covid-19, we won’t feel the impact as much.
That is, unless your company pays you in US dollars. In that case, those dollars will be worth a little more in Australia.
Consumer spending could tick up slightly
Again, given it’s a marginal rate cut, this should increase consumer spending marginally, but not drastically.
“The RBA has said, and I would agree, that the real action now is with fiscal policy,” Oliver said.
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