With so much speculation regarding an imminent rate cut leading up to the RBAs announcement on 6th May, their decision to keep the official cash rate unchanged 1.50% may have seemed a little anticlimactic. However, in the RBA’s quarterly Monetary Policy Statement released four days later, they slashed their economic expectations. This provided the strongest indication yet that rates will soon be cut.
The Statement sets out the Reserve Bank’s assessment of current economic conditions, both domestic and international, along with the outlook for Australian inflation and output growth. With economic growth in Australia continuing to under perform, they announced a dramatic revision to their forecast on the annual economic growth rate over the year up to June from 2.5 to 1.7 per cent. However, they do anticipate a modest rebound in growth by the end of the year to 2.6 per cent.
The key point here is that the Reserve Bank use market pricing to set the interest rates used in their forecasts, and the market is pricing two rate cuts within the next 12 months. And given the Reserve Bank’s policy that ‘low interest rates are continuing to support the Australian economy’, their forecast for a rebound in growth is reliant on the cash rate falling. Even then, inflation will remain under the Reserve Bank’ 2-3 per cent mandated target. This surely means that two cuts to the cash rate are now a certainty, and probably very soon.
While many economists had predicted the next rate cut would not come any earlier than August, the release of a second consecutive month of increased unemployment figures last week has resulted in mounting speculation that a cut to the cash rate is likely to come sooner. The RBA has previously stated that ‘a slackness in the labour market would warrant a cut’ and as a result, economists now believe there is a 50/50 chance of rates being cut in June.
If the cash rate is reduced, what will this mean for borrowers? The RBA expects that any reductions in rate will be passed on by the banks due to the fact that the rising funding costs that triggered increases in home loan rates last year have now disappeared. However, there will still be a lag between the cuts being implemented and this impact being felt on the economy or by consumers directly.
Right now, there is significant competition between lenders to attract new customers, so it is new borrowers who are benefiting over existing borrowers. This creates an opportunity for borrowers shop around for a better deal rather than waiting on any reductions to be passed on by their current lender.
If you are interested in finding out what rates you might qualify for in the current market, then contact us today so we can advise you on which lenders best suit your circumstances.