News & Analysis

The RBA cut interest rates to a new record low and banks are cutting loan rates too

- June 4, 2019 5 MIN READ

 

  • Australia’s official cash rate now sits at 1.25% following a 25 basis points cut
  • Three of the big 4 banks are reducing home loan rates, with CBA and NAB passing on the full 0.25%
  • The RBA remains concerned about unemployment rising, stagnant wages growth and inflation under its target band.
  • The cut should help keep the dollar down, which is good news for exporters

The Reserve Bank of Australia (RBA) has cut official interest rates to just 1.25%.

The cut of 25 basis points sets a new record low amid concerns from RBA Governor Philip Lowe about rising unemployment, low inflation and stagnant wages growth.  The move was widely predicted.

The last time the central bank cut rates was August 2016.

“The Board took this decision to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target,” Lowe said in his statement following the announcement.

With markets predicting another cut later this year, Lowe said 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”.

The RBA boss is hoping the reduction in the cash rate help address a recent uptick in the unemployment rate, which had been steady at around 5% in recent months before rising to 5.2% in April, bucking recent strong employment growth.

“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,” he said.

The bank still expects the economy to grow at around 2.75% in 2019 and 2020, but inflation was lower than expected, Lowe said with inflationary pressures subdued.

“The central scenario remains for underlying inflation to be 1.75% this year, 2% in 2020 and a little higher after that,” he said.

The bank remains concerned about household consumption, the chief driver of economic growth, especially with property values falling in the country’s largest housing markets, Sydney and Melbourne.

“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,” Lowe said.

But he’s positive about the housing market overall, a key contributor to consumer sentiment.

“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,” Lowe said.

“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.”

Retail sales figures released before the RBA board met revealed a reduction in consumer spending, but Lowe said “some pick-up in growth in household disposable income is expected” if pay rises kick in, although they remain dependent on unemployment falling and putting pressure on wages.

“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,” he said.

“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 RBA is also positive about the global economy saying the outlook “remains reasonable, although the downside risks stemming from the trade disputes have increased”.

US President Donald Trump’s ad hoc tariffs appear to be creating global uncertainty in Lowe’s eyes, although our biggest trading partner, China is propping up its economy and Australian trade is benefiting from a pick-up in activity in the resources sector, partly in response to an increase in the prices of exports.

“Growth in international trade remains weak and the increased uncertainty is affecting investment intentions in a number of countries,” he said.

“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.”

 

Banks respond

The ANZ was the first bank to respond to the RBA decision, passing on around 70% of the rate cut within minutes, with variable rate loans reduced by 0.18 percentage points.

But with the federal government pressing the banks to pass on the full cut Treasurer Josh Frydenberg was unimpressed.

“I think the ANZ has let down its customers. This is deeply disappointing,” he said.

ANZ retail and commercial banking boss Mark Hand said several factors influenced the bank’s decision, including market conditions.

“While we recognise some home loan customers will be disappointed, in making this decision we have needed to balance the increased cost in managing our business with our desire to provide customers with the most competitive lending and deposit rates possible,” he said.

The Commonwealth (CBA) decided to pass on the full cut to standard variable rate (SVR) home loans.

The move means owner-occupier principal and interest loans will fall to 5.12%, with interest-only loans down to 5.67%, with P&I investment loans falling to 5.7%, and interest-only loans to 6.14%.

The change cuts repayments on a $400,000 owner-occupier loan by $62 a month. The change kicks in on June 25.

NAB was the third of the big four to move and will pass on the full 0.25%  to its SVR home loans – and will do so from June 14.

Westpac has yet to make an announcement, several hours after the RBA cut.

NAB Chief Customer Officer – Consumer Banking, Mike Baird said it will put interest rates at their lowest levels in more than 40 years.

“Funding costs have decreased in recent months reflecting improvements in domestic and offshore wholesale funding market conditions,” he said.

“At the same time the difference between what we charge and how much it costs us to fund a mortgage remains under pressure, given intense competition and increasing deposit costs.

“Decisions like this are never easy and we need to consider customer, shareholder and community expectations as well as the current economic environment to strike the right balance. Reducing our variable home loan interest rates by the full 0.25% per annum is the right decision today.”

The reduction deliver similar savings to an owner-occupier borrowing $400,000 –  $62 per month or $744 per year.

Business response

Council of Small Business of Australia CEO Peter Strong said the RBA decision will not have a direct impact on many small businesses as the rate is already so low.

“It could impact on those who are involved in exporting and will also be of benefit as it should add confidence to the consumer market, and a confident consumer is always good for small business,” he said.

Australian Retailers’ Association executive director Russell Zimmerman, said the cut would aid struggling retailers.

“We’ve known for quite some time that retailers are doing it tough, with retail sales growth figures for 2017-18 the lowest since the Australian Bureau of Statistics started keeping records 50 years ago,” he said.

“Trade figures for April that were released this morning, whilst still reasonably robust on a year-on-year basis, show further significant deterioration on the March numbers.”

“Today’s cut should consolidate other stimulatory changes that will filter through over the next few months and, we hope, give struggling retail business owners an opportunity to catch a break.”

Dr Shane Oliver, Chief Economist at AMP Capital said lower interest rates will help keep the Aussie dollar down.

“Australian companies probably need that to get a bit of a boost when it comes to competing internationally,” he said.

“The cut should also help the housing market find its bottom, however, it’s unlikely to set off another housing market boom, due to household debt being substantially higher than in the past, tighter bank lending standards and the chance of rising unemployment.”

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