RBA has lowered the official cash rate to a record low of 0.10%
- Posted By Pasang Sherpa
With the start of its economic recovery from the coronavirus crisis, the Reserve Bank of Australia decreased the official cash rate by 15 basis points to a new historic low of 0.10%.
The board agreed on the package of additional steps to encourage jobs and the stabilization of the after-pandemic Australian economy. RBA Governor Philip Lowe said.
“With Australia facing a period of high unemployment, the Reserve Bank is committed to doing what it can to support the creation of jobs,” Mr. Lowe said in a statement Tuesday.
“Encouragingly, the recent economic data have been a bit better than expected and the near-term outlook is better than it was three months ago.
“Even so, the recovery is still expected to be bumpy and drawn out and the outlook remains dependent on successful containment of the virus.”
SWIFT ACTION TAKEN BY RBA TO BOOST ECONOMY
Cameron Kusher, Executive Economic Analysis Manager at realestate.com.au said the Board strongly thought the action should have been taken earlier rather than late.
“With government spending ramping up and levels of debt to follow, it’s clear the RBA felt that it was necessary to provide additional monetary policy support to assist the economic recovery,” Mr. Kusher said.
“Concerns about higher interest rates relative to other countries and the subsequent pressure on the Australian currency was surely also a major factor in the decision to reduce the cash rate similar to levels seen overseas.”
Mr. Kusher said it was somewhat interesting to see the RBA lower rates further in the light of recent loan data from the Australian Bureau of Statistics, which showed the highest monthly mortgage lending volume reported in September.
“You would think lower rates, assuming they are passed on to mortgage holders, would increase housing demand and push prices higher,” he explained.
The RBA Council has repeatedly indicated that once progress is made towards full jobs, it will not raise its cash rate goal and is optimistic that inflation will continue to be below the 2-3 percent target.
THE FIRST "CUP DAY CUT" SINCE 2011
67 percent of respondents correctly expected a third rate decline for 2020 in a new Finder poll of analysts and economists.
Hunter Graham Cooke's Insights Manager said that the rate cut in November was not obvious.
“For the first time since 2011, the RBA has declared a Cup Day cut despite some skepticism from experts around the effectiveness of further monetary stimulus measures,” Mr. Cooke said.
“But significant considerations like the strength of the Australian dollar and a lagging Victorian economy have supported the case for further easing.
“I suspect the horse races weren’t the only thing punters were betting on today,” Mr. Cooke said.
The Australian economy is turning a corner according to Dr. Andrew Wilson, chief economist in My Housing Market.
For homeowners, what does the rate decision imply?
Sam Boer, CEO of Smartline Mortgage Advisors, said that the rate cut is "great news" for borrowers, given that banks pass it on to their clients.
“The RBA hopes the cut will reduce expenses for businesses and create jobs; reduce pressure on mortgage holders and minimize the number of loan defaults; and of course, kick-start spending and the economy. But banks will need to lower their rates the full 0.15% to really have an effect,” Mr. Boer explained.
He noted that the reduction would benefit those trying to make ends meet in the aftermath of the pandemic, as well as those already back on their feet.
“I strongly recommend putting the extra cash on your mortgage … I suggest taking advantage of these remarkably low rates and paying off as much as you can – the interest you will save over the long term is significant,” he said.
“As lenders announce how much they will cut their rates, you may find you can get a better rate with a different lender. If your lender is no longer competitive, talk to your mortgage adviser to see if they can get you a better rate by refinancing.
“Some borrowers may find they can borrow more at a lower rate, which may be useful for anyone wanting to upgrade or renovate their home. If this is the case for you, now may be a good time to take the plunge.”
Mr. Boer said the rate cut would potentially encourage first-home buyers to borrow that little bit more, which might be the difference between having to compromise and getting the home they want.
“But first-home buyers should make sure they speak to an experienced mortgage adviser who can provide them with a number of options from a range of lenders,” he said.
“Banks are even more competitive for your custom now, so you are in a good position to look around and find the loan that suits you best.
“There can be large differences in the rate you get from different lenders.”
IS IT A GOOD TIME TO BUY PROPERTY NOW?
According to the Finder survey, 71 percent of expert respondents expected house prices to increase in both Melbourne and Sydney over the next two years, while 69 percent expected domestic prices to rise over the same period.
This was backed by the findings of Finder's Economic Optimism Tracker, which found that housing affordability experts' positivity improved from 59 percent in June to just 25 percent in November.
Mr. Cooke said that there are several reasons that will raise property prices in the coming year.
“Experts are feeling fairly confident about house price recovery over the next two years – especially in Melbourne and Sydney,” he said.
“The nation is experiencing a prolonged period of low interest rates, alongside fiscal support from both regulators and the government, which is propping up buyer confidence.
“The recession also hasn’t been as severe as expected, meaning our economic recovery should be more robust. However, there may be some pressure from emergency house sales once the mortgage holiday period ends in March 2021.”
Mr. Kusher said the property market in Australia is kept alive by record amounts of government stimulus, but as these help begin to peter out, the litmus test will arrive.
“Property prices have remained buoyant so far during the pandemic, but once wage subsidies and loan holiday periods expire many mortgage holders, particularly investors, could be forced to sell up.
“A glut of rental properties in our bigger cities could push rental prices down, leading potentially to an influx of rental properties for sale.
“These effects could put downward pressure on property prices, however, it is likely to be contained to specific market places such as inner city units and lifestyle markets strongly reliant on overseas tourism.
“The record low interest rates and government stimulus present a good opportunity for house hunters in a secure financial position to break into the property market,” Mr Kusher added.
SOURCE:
McLean, S., 2020. Realestate.com.au. [Online]
Available at: https://www.realestate.com.au/news/rba-makes-cup-day-rate-cut-as-economy-bounces-back/