The RBA rate cut – and why it wasn’t designed for homeowners

If you have a mortgage and it isn’t locked into a fixed rate, you definitely have cause to celebrate this week!

The Reserve Bank of Australia has lopped 0.25% off the cash rate, bringing it to a historic low of 1.75%. All of the big banks have already confirmed they’re passing on the full reduction to mortgage holders, except for ANZ who have deviated from the pack, only passing on a reduction of 0.19%.

Here’s the interesting thing about this decision, though. While mortgage holders across the country are obviously very happy (myself included!), the Reserve Bank’s decision wasn’t made with us in mind.

Instead, the move to reduce the cash rate was designed to trigger businesses to invest, rather than to stimulate home or investment property buyers.

The truth of the matter is that Australia is headed towards an economic downturn.

 Economists had been expecting a soft result in terms of inflation for the first quarter of 2016 – but no one expected the economy to actually go backwards.

So when the Australian Bureau of Statistics announced at the end of April that the consumer price index (CPI) had contracted 0.2% in the three months to March, everyone took notice.

This is the first time the economy has contracted in seven years, since the GFC, and it’s mainly due to falling commodity prices and aggressive discounting from retailers.

It has reduced the annual inflation rate to 1.3%, down from 1.7% in December. This is well below the target inflation range of 2-3% and frankly, we can’t afford for it drop much lower.

The federal government's decision to reduce the company tax rate to 27.5% (down from 30%) for all businesses with a turnover of $10m or less, was a budget measure designed to stimulate the economy and narrow the deficit.

But the Reserve Bank knew they needed to take action as well.

So, in an effort to head off falling prices and a deflation in the CPI, they announced an interest rate cut. This pretty clearly demonstrates that the RBA is comfortable with the fact that APRA’s pressure is keeping property prices in check, so cutting interest rates right now is not likely to cause a spike in property prices.

It also means we are slowly aligning ourselves with interest rate strategies in other countries in the OECD (Organisation for Economic Co-operation and Development), an international economic organisation of 34 countries (including Australia) that supports economic progress and promotes world trade.

Now, as it stands today, most economists expect a second cut before the end of the year. I actually predicted that we would see up to two rate cuts this year in an article I wrote in December!

Again, this is great news if you’re a mortgage holder – but it doesn’t convey much confidence in the Australian economy and its ability to rebound in the month ahead.

There is now a lot of pressure on the June quarter inflation figure, due for release in August, which many ‘in the know’ believe will determine the RBA's next move.

In the meantime, investors may want to think long and hard before fixing their interest rates, as the savings from this rate cut on a $400,000 mortgage equate to substantial $1,000 per year.

Financial website Finder has done a great job of compiling the interest rate decisions each bank and lender has made following the RBA decision, with a summary of the major lenders below.

If you have any questions about interest rates or you’re not sure what direction to go in with your mortgage, get in touch with our team for an obligation free chat. Call us on 1300 266 350 or click here to contact us.

   Philippe Brach is CEO of Multifocus Properties & Finance. He has over 15 years experience in property investment and has helped many first time and experienced investors achieve their goals. He is also the well-recognised author of the book ‘Creating Property Wealth in any Market’ which lays out in detail what it means to invest in property.

Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property