Articles

RBA cuts rates to a new historic low

  • Source: SBS News, 5 May 2015
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Home loan borrowers will be cheering after the Reserve Bank of Australia cut the official cash rate to a new record low of two per cent.

The RBA trimmed the cash rate by 0.25 of a percentage point at its monthly board meeting on Tuesday.

The cut was in line with the expectations of the market, which had forecast a 76 per cent chance of a rate cut.

The RBA’s decision will mean repayments on a $300,000 mortgage will drop by more than $40 a month if retail banks fully pass on the cut.

Commonwealth Bank of Australia senior economist Michael Workman said soft investment outside the mining sector had probably been a key factor in the RBA’s decision.

“It remains quite weak and business surveys are telling people that there’s quite low confidence among the private sector,” Mr Workman told AAP.

He said the cut was good news for home loan borrowers, which he described as a “noisy minority”, but bad for those with savings.

He said there was a good chance Tuesday’s cut wouldn’t be the last from the RBA, even though the central bank gave no indication there were more cuts to come.

“You’d have to say there’s a reasonable chance they would go again. The inflation outlook according to the RBA provides some opportunity for the rate to be cut again,” Mr Workman said.

The RBA decision to cut the cash rate comes after it made a similar reduction in February.

In March and April, the RBA kept rates on hold, causing the futures market to price in expectations for another interest rate cut this month.

But that forecast changed after a surprise fall in the unemployment rate, and was complicated by a moderation in house prices and a recovery in iron ore prices.

Michelle Hutchison, from Creditcardfinder, said Tuesday’s rate cut would please Aussies with variable rate home loans.

“Most borrowers who have a variable rate home loan will be rejoicing in saving about $47 per month for an average $300,000 home loan from today’s rate cut announcement,” Ms Hutchison said.

But she warned borrowers not to expect further cuts this year.

“It looks like the party is over for more rate drops,” she said in a statement.

“Interest rate hikes are right around the corner, with the majority of experts … forecasting interest rates to start rising from as early as February next year.”

RBA Rates Decision - Full Statement

RBA RATES DECISION — FULL TEXT

Statement by Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 2.0 per cent, effective 6 May 2015.

The global economy is expanding at a moderate pace, but commodity prices have declined over the past year, in some cases sharply. These trends appear largely to reflect increased supply, including from Australia. Australia’s terms of trade are falling nonetheless.

The Federal Reserve is expected to start increasing its policy rate later this year, but some other major central banks are stepping up the pace of unconventional policy measures.

Hence, financial conditions remain very accommodative globally, with long-term borrowing rates for sovereigns and creditworthy private borrowers remarkably low.

In Australia, the available information suggests improved trends in household demand over the past six months and stronger growth in employment. Looking ahead, the key drag on private demand is likely to be weakness in business capital expenditure in both the mining and non-mining sectors over the coming year. Public spending is also scheduled to be subdued. The economy is therefore likely to be operating with a degree of spare capacity for some time yet. Inflation is forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.

Low interest rates are acting to support borrowing and spending, and credit is recording moderate growth overall, with stronger lending to businesses of late. Growth in lending to the housing market has been steady over recent months. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have been supported by lower long-term interest rates.

The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.

At today’s meeting, the Board judged that the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand.

 

For the full article visit http://www.sbs.com.au/news/article/2015/05/05/rba-cuts-rates-new-historic-low-may