31 consecutive meetings.
That’s how long the RBA has kept the record low official cash rate at 1.5%. All the way back to August 2016.
Will this streak remain uninterrupted? Or are we heading towards a change?
Speculation has hit overdrive that the RBA will make a rate cut when it meets next week.
Here we examine the main reasons we may see a cut to the official cash rate and what a rate cut could mean for you and your home loan.
Inflation reasons
Australian Bureau of Statistics data reveals that inflation remained unchanged in the March quarter, with the consumer price index at 0.0 per cent, bringing the annualised rate down to 1.3 per cent.
This unexpected reading has financial markets predicting an increased likelihood of an RBA rate cut next week.
Some senior bank executives have agreed with the notion (in theory) of a rate cut, with ANZ Bank Chief Shayne Elliot saying a reduction to the cash rate would boost economic activity and give “breathing space” to borrowers who are struggling to meet loan repayments.
“Maybe it will just give a bit of juice into the economy, and get a bit more employment, and put a bit of money back into people’s pockets,” Elliott says.
However as we all know, a reduction to the RBA cash rate is not always passed on to borrowers…. as we discuss below.
Unemployment figures
Australian Bureau of Statistics shows that the unemployment rate in Australia has risen to 5.2%, which exceeds expectations of a 5% rate.
RBA Governor Phillip Lowe publicly stated last week that without cutting rates, unemployment would not go down and incomes would not increase.
“A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target. Given this assessment, at our meeting in two weeks’ time, we will consider the case for lower interest rates,” Lowe said.
House prices
Nationally, the heat has come out of the property market.
Every capital city (except for Canberra) saw house prices fall in April. In fact, Canberra and Hobart are the only two capitals where prices are still growing above the inflation rate on an annual basis.
CoreLogic’s research director Tim Lawless says a rate cut could help the property market.
“The prospect for lower interest rates is another factor that could support an improvement in housing market activity later this year,” says Lawless.
The federal election
There was plenty of speculation earlier this month in regards to the RBA announcing a rate cut. However, we don’t often see it happen during the middle of a federal election campaign.
“Changing monetary policy during an election risks the central bank being caught up in a political fight,” says the AFR’s senior economics writers in an analysis piece.
Now that the election is over, this is no longer a concern.
What would a rate cut mean for you and your home loan?
Earlier this month, analysis commissioned by the AFR suggested that a cash rate cut of 25 basis points was unlikely to have a meaningful effect on lending rates or property prices – mainly because analysts expected lenders to keep their rates the same, or only pass on a portion of the rate cut. Market sentiment has now changed, with an AFR article published on 29 May indicating that expects now expect the lenders to pass on any rate cut.
We’ll eagerly await the announcement following the RBA meeting next week.
And more importantly, we’ll be gauging response from lenders, so we can advise how any changes will affect you and your loans.
Make sure you’re following along on Facebook to get all our interest rate updates next week.
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