Michele Bullock, the new Governor of the Reserve Bank of Australia (RBA), will face the media for the first time later today. She will almost certainly announce the second interest rate cut of the current cycle. The RBA’s monetary policy meeting will conclude at 2:30 PM AEST, where a 0.25 percentage point reduction in the cash rate, currently at 4.1 percent, is anticipated based on economist forecasts and market pricing.
If lenders fully pass on this reduction, borrowers with a $500 thousand mortgage could have an instantaneous benefit of $880 per year. So their minimum repayments could decrease by $76, making their total around $3,164. According to Canstar, a financial services comparison website, that’s a conservative estimate. It only applies to the hypothetical owner-occupier who currently pays principal and interest on a loan over 25 years. Banks are likely to start passing on this cut as early as next month. This pad is indeed likely, assuming today’s interest rate of 6.06 percent does not change.
Economic Context
When the pandemic economic crisis hit, the RBA acted swiftly and strongly. That’s when in November 2020 they dramatically reduced the cash rate to an unprecedented low of 0.1 percent. As of November 2023, the rate was set at 4.35 percent. Then, cut it again by 0.25 percentage points at the beginning of this February. Faced with rising concern over living costs, analysts are calling for one more cut to ease the financial burden of consumers.
David Bassanese, chief economist at Betashares, noted that a more substantial cut of 0.35 percentage points would “re-align the RBA official cash rate to its traditional quarter point increment levels.” It reflects a larger approach of keeping a steady ship in monetary policy, despite increasing pressures from all the signs of an overheating economy.
The next release of the quarterly Statement on Monetary Policy (SoMP) will come along with the interest rate decision. This statement makes predictions about inflation, unemployment, and growth, shedding more light on the RBA’s economic baseline.
Market Implications
Canstar’s Sally Tindall said if the cash rate was cut in May, it would potentially trigger some intense competition between lenders. Loan terms Borrowers will want to compare their rates with what’s being offered in the market. She emphasized, “If the cash rate drops to 3.85 percent, the average owner-occupier could see their variable rate fall below 6 percent. Borrowers can do far better than this.” Tindall expects more than 30 lenders to come in under 5.50 percent if the cut goes ahead.
With higher costs pushing consumers to find the lowest possible interest rate, the overall lending market is more competitive than ever. Tindall thinks that this kind of environment will lead borrowers to shop more and search for better deals.
Public Sentiment
Reactions to the idea of a major rate cut are mixed – relief and concern. One individual expressed ambivalence about rate changes, saying, “On one hand, I’m two months into my first mortgage on a single income, and a cut would help me a lot. On the other hand, I have friends who are struggling to find an affordable place in a safe suburb.” This concern resonates with a growing national chorus from all who are just trying to get by in an ever more difficult housing ecosystem.
The RBA will announce its decision this afternoon. Millions of Australians expect the Reserve Bank’s next rate cut to increase their financial breathing space, but they want more assurance that such monetary policy decisions will support housing availability and affordability.
Leave a Reply