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New historic low for interest rates

— 1 minute read

The RBA has dropped rates for the second time in a row by another 25 basis points, bringing the official interest rate down to a new record low of 1 per cent. 

The move was widely anticipated by the industry, with two in three economists predicting the July rate cut and many predicting that it still has room to go down further.

The new rate means there has been a 50-basis-point deduction in two months, after the year started with a rate of 1.50 and then went down to 1.25 in the cut last month. 

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RBA governor Philip Lowe said that the easing of monetary policy would support employment growth and provider greater confidence. 

“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,” he said. 

Mr Lowe said the outlook globally still remained reasonable, but uncertainty generated by trade and technology had impacted investments and risks. 

“The persistent downside risks to the global economy combined with subdued inflation have led to expectations of easing of monetary policy by the major central banks.”

Mr Lowe said the central scenario for the Australian economy remained reasonable and unemployment had risen slightly and there was an expected wages growth lift to come. 

“Taken together, these labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment."

Fidelity International’s investment specialist, Anthony Doyle, said the cut was in line with expectations and that another cut is expected this year. 

“The Australian economy now has the sixth lowest official interest rate in the world, only 0.25 per cent above the UK – an economy that is currently bearing the brunt of uncertainty over its future trading status with Europe. The market continues to expect another interest rate cut from the RBA by December,” he said. 

Mr Doyle said it was a clear sign that the economy required further monetary policy stimulus in order to meet its inflation objective. 

“In coming months, governor Lowe and the RBA will likely continue to call on federal and state governments to support growth going forward through both fiscal easing and structural policies designed to support job growth,” he said. 

According to Finder, 68 per cent of its experts and economists had correctly guessed the July rate cut, and insights manager Graham Cooke said he would not be surprised if there was a third. 

“Frankly, two cuts might not be either, but it’s a step in the right direction and it’s great news for home owners. It’s two down and maybe one or two more to go,” he said. 

The news is great for mortgage-holders who may save thousands, but it is not welcome news for savers, particularly retirees. 

If banks pass on the full 50-basis-point interest rate cut, Australians could lose $2.6 billion in a year, according to Mr Cooke. 

“For those with a few thousand dollars in savings, a cut might seem like a drop in the ocean, but this has huge consequences for retirees living off their interest. 

“It’s a timely reminder to stay on top of your savings account and see if you could be getting a better deal – especially as high rates will be harder to find,” he said. 

This environment though was perfect for neobanks to begin to thrive, said Xinja chief executive and founder Eric Wilson, as banks’ deposit rates didn’t give them a massive advantage. 

“Some of the advantages neobanks have in this is that it brings us much closer to the ability to compete with the larger banks because their deposit rates aren’t giving them quite as much of an advantage. 

“And of course, we have much lower operating costs, we don’t have legacy IT or branch networks, we don't have tens of thousands of people, so that allows us to pass those savings onto the customer,” he said. 

Consumers should use this time to pay down debt and actually increase their repayments if they are able, said Mr Wilson, particularly as another cut may happen. 

“I’m fairly confident there will be another rate cut this year. The economy is heading into some fairly serious stormy water, so I think the RBA will do all it can to prevent that from happening,” he said. 

Banks respond

Already ANZ has announced it would pass on the full rate cut to its variable interest home loan rates, with group executive Australia retail and commercial Mark Hand saying the reduction would be passed across all variable rates. 

“Today we have decided we will reduce variable interest rates for our home loan customers by 0.25 per cent p.a. Importantly, we will apply this reduction across all our variable rate home loans.”

NAB announced it would reduce its variable home loan rates by 0.19 per cent per annum with chief customer officer of Consumer Banking Mike Baird saying the 19 basis point reduction would save Aussies thousands. 

“This is on top of the 25-basis point reduction last month, which means customers with an average $400,000 loan could save a total of $1296 a year,” Mr Baird said.

Westpac cut its range of mortgage rates by 20 basis points for owner occupier customers and 30 basis points for investor customers. 

“Today’s announcement means our Standard Variable Rate (SVR) will be the lowest it has been in more than 45 years for owner occupier home loan customers with principal and interest repayments,” David Lindberg, Westpac chief executive, Consumer said.

CBA followed NAB's route and reduced their standard variable rate home loans by 0.19 per cent to a new record low of 4.93 per cent but limited interest rate deduction for its popular savings account. 

“We have carefully considered how to respond to this latest official interest rate cut, given that it is not possible to pass on the full rate reduction to over $160 billion of our deposits, including deposits where interest rates are at or already near zero. We have made a deliberate choice to limit the interest rate reduction to 0.15% p.a. on our most popular savings account, NetBank Saver," said Angus Sullivan, group executive Retail Banking Services. 

 

New historic low for interest rates
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Eliot Hastie

Eliot Hastie

Eliot Hastie is a journalist at Momentum Media, writing primarily for its wealth and financial services platforms. 

Eliot joined the team in 2018 having previously written on Real Estate Business with Momentum Media as well.

Eliot graduated from the University of Westminster, UK with a Bachelor of Arts (Journalism).

You can email him on: [email protected]

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