In its October meeting, the Reserve Bank of Australia (RBA) has cut the cash rate by 25 basis points, marking Australia’s cash rate to a historic low of 75 per cent. This is the third reduction in five months in the government’s attempt to stimulate the economy.
Governor Philip Lowe earlier said that the RBA is prepared to push rates lower in order to lift employment and stubbornly low inflation.
In his statement, the governor said that with the US-China trade disputes affecting the world and businesses scaling back investments, there are associated risks even though the global economy remains stable.
He said that an extended period of low-interest rates is reasonable, hinting that the bank is ready to further ease monetary policies.
Lowe noted that Australia’s economic growth was “weaker than expected.” Even though it increased by 1.4% in the year to June, it still is the lowest recorded annual rate since 2009.
Unemployment rate barely increased from 5% at the start of the year to 5.3% in August. And with the inflation rate of 1.6%, economists predict rates to fall further to as low as 0.5% in order to stimulate the economy.
Australia’s Cash Rate Cuts Brought a Gentle Turning Point
Lowe described recent economic changes as a “gentle turning point,” with growth slightly higher over the past two quarters of 2019 than the last two quarters of 2018.
He remains positive growth will continue as “the low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some established housing markets and a brighter outlook for the resources sector should all support growth.”
Still, Lowe said that the employment rate growth is likely to slow down given that wage growth remains subdued and that “there is little upward pressure at present,” as increased labour demand is continuously being met by more supply.
Will Home Buyers Get the Full Cut?
Treasurer Josh Frydenberg urged lenders to pass on the full rate cut. A full 25% is worth $720 a year to households with a mortgage of $400,000.
The Australian Chamber of Commerce and Industry showed a sense of unity as it urged lenders as well, to pass on the cut and let Australian households benefit from Australia’s cash rate.
To these, the Commonwealth Bank of Australia (CBA), one of the big four banks in Australia responded by announcing it would reduce its standard variable rate for home loan customers by between 13% and 25%.
The CBA said that with Australia’s cash rate at a record low, it is doing a “difficult balancing act” between multiple interests of its stakeholders.
Retail Banking Services group executive Angus Sullivan said is not currently feasible to pass on the full rate cut to more than $160 billion of their total deposits which are at or near-zero rates.
“In balancing these interests, we have carefully considered how to best meet the needs of over 6 million savings customers – who may find it challenging to make ends meet with record low savings interest rates – with the needs of our 1.6 million home loan customers, who want to pay less on their mortgages; and the needs of our shareholders, many of whom are retirees who rely on our dividend,” he said.
The CBA’s adjusted standard variable rate for home loans will take effect on October 22.
P.S. Watch out for our future posts to find out how much you are getting from the cut.
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