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Category: Money and Monetary Policy / Economic Trends / Banking

Interest rates cut to fresh record low of 1.5pc, banks pass on half

Tuesday, 2 Aug 2016 12:30:05 | Michael Janda

The Reserve Bank last lowered interest rates in May. (AAP)

The Reserve Bank has cut the official interest rate to a fresh low of just 1.5 per cent, in a desperate effort to stoke price growth.

Key points:

  • RBA cuts cash rate by 25 basis points to 1.5 per cent
  • Some economists say there could be more cuts on the way
  • The CBA was the first big bank to move, only passing on 13 basis points

The RBA last cut its overnight cash rate target in May, taking it to 1.75 per cent, following weak consumer price data in the March quarter.

ABS June quarter inflation data, out last Wednesday, showed consumer prices rose just 1 per cent over the past year, with the Reserve Bank's preferred measure also well below its 2-3 per cent target.

After that release, markets priced the chances of a rate cut as roughly 50-50, but bets had since gone up to a 75 per cent chance of a rate reduction.

The odds were similar when looking at economist forecasts, with 20 of 25 surveyed by Bloomberg expecting a rate cut today.

That explains why the Australian dollar recovered quickly from a half-cent fall on the decision to be almost where it was ahead of the rate cut at 75.25 US cents.

AMP Capital Investors chief economist Shane Oliver told Reuters the currency would have moved dramatically in the other direction if the RBA disappointed.

"I suspect that the Reserve Bank has been dragged kicking and screaming to this rate cut again.

"With the inflation numbers so low and the risk that if they didn't cut that the Aussie dollar would have been 76-77 (US cents) by now, they felt they probably had to act."

Rates could have further to fall

RBA's rate dilemma


The Reserve Bank sets one cash rate for the nation, but it is simply not appropriate for some states, explains Stephen Long.

Most experts expect today's rate cut to be the last, but about a third of the analysts surveyed by financial comparison website Finder are expecting more cuts, with six out of 41 expecting a trough of 1 per cent or less.

It is a forecast that JP Morgan's Sally Auld agrees with, predicting that rates will remain on hold at 1.5 per cent this year before being cut twice more in the first half of 2017.

Finder's Graham Cooke said it is important for consumers to re-evaluate their current home loan to make sure their bank is passing on the reduction in full.

"If you had a $300,000 mortgage with an average standard variable rate of 4.93 per cent and manage to get the full discount of 0.25 percentage points off your interest rate, this could pocket you almost $50 per month, or a whopping $16,325 over the life of your loan," he observed.

CBA passes on half the cut, NAB less

However, it appears that the major banks will not pass on all of the Reserve Bank's rate cut, with the Commonwealth Bank lowering its standard variable mortgage rate by only 13 basis points.

That is roughly half of the Reserve Bank's 25-basis-point official rate cut.

Business borrowers will also only receive a 13-basis-point rate cut from CBA.

External Link: NAB tweets its 10bp mortgage rate reduction

However, National Australia Bank is passing on even less, cutting its standard variable mortgage and business loan rates by just 10 basis points.

Both NAB and CBA customers will also have to wait more than two weeks to get the benefit of the rate reduction, with it taking effect on Friday, August 19.

In some rare good news for savers, however, CBA is passing on a rate increase of at least 50 basis points to new one, two and three-year term deposits.

NAB will also offer a special 2.9 per cent rate on new eight-month term deposits from Monday, a 0.85-percentage-point increase.

Reserve Bank now relaxed about housing market

Perhaps the most notable change to the Reserve Bank's post-meeting statement was its relaxed commentary about the booming east coast housing market.

Seemingly contradicting yesterday's CoreLogic data showing a 9.1 per cent annual surge in Sydney home prices, the Reserve Bank's governor Glenn Stevens said prices "have been rising only modestly over the course of this year".

He also pointed to the boom in apartment construction in east coast cities boosting supply over the next couple of years, presumably in the context that this will put downward pressure on prices.

"Growth in lending for housing purposes has slowed a little this year," Mr Stevens added.

All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished.

Capital Economics, which was last week strongly tipping today's cut as a "done deal", said these comments indicate that the door is open to a 1 per cent cash rate by mid-2017.

"Financial stability concerns won't prevent the RBA from using lower rates to weaken the dollar and boost inflation," the organisation wrote in a note.

AustraliaPlus


 

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