Interest Rate Cut by Reserve Bank

The Reserve Bank’s decision to lower the cash rate by 25 basis points to 4.5% aims ‘to deliver an added boost to confidence’.

Why was there a rate cut?

• Global financial markets have recovered somewhat from the turmoil of recent months.
• Australia's terms of trade have now peaked and will decline somewhat in the near term, but they remain very high.
• Recent information is consistent with a moderation in the pace of global growth.
• Subdued demand conditions and the high exchange rate have contained inflation more recently.
• The unemployment rate has increased a little over recent months and it remains close to 5 per cent.
• Financial conditions have been easing somewhat recently, with market interest rates declining a little and competition to lend increasing.
• The exchange rate has been very variable over the past few months, but on the whole has remained at historically high levels.

What does it all mean?

Mortgages

The major banks have responded to the RBA rate cuts. Westpac has moved to match the RBA, cutting its standard variable rate by 25 basis points to 7.61 per cent, effective from November 14. Fellow big four bank Commonwealth Bank also lowered rates on a series of variable home packages by 25 basis points, trimming them to between 7.66 per cent and 6.86 per cent, depending on the product, effective from Friday.

ANZ has become the third major bank to reduced interest rates commenting it will reduce interest rates by 0.25 of a percentage point to 7.55 % as of November 14^th.

NAB also passed on a reduction in interest rates but only by 20 basis points, 5 basis points lower than the RBA reduction.

For those with mortgages, the RBA’s rate cut has the following implications, depending on which bank you use:

Mortgage Size                     Reduction in monthly repayments

$250,000                               $-32.71

$500,000                               $-81.78

$750,000                               $-122.67

With more than 106,000 people who rent in Sydney are facing difficulties meeting the basic costs of living and Over 73,000 or 12% of mortgage holders in Sydney are in housing stress, with the figures even higher for first-home buyers, with 15% (just over 15,000) struggling to make ends meet. 26% of renters are in a similar situation, the rate cut will help ease financial tension.

The cut has also sparked an interest from borrowers who are looking at other banking and financial institutions and seeking out the best deal for their home loans assisted by the move to ban exit fees on loans.

New Treasury figures show more than 167,000 households have taken out a home loan since the government banned mortgage exit fees.

Pensioners

Self funded retirees and pensioners with cash savings and fixed interest investments will see a decline over the next few weeks in interest earnings.

Retailers

The reductions in interest rates means consumers have some room to breathe as Christmas approaches. The easing of monthly mortgage repayments will endeavor to increase spending after retail figures stumbled to 1/3 of the usual growth rate.

First Home Buyers

It is hoped that the rate cut will spark confidence amongst those who have been looking to buy their first home, but who have been holding back in fear of uncertain economic conditions. Although the Housing Industry Association commented that ‘rates will need to go lower to revive the industry’, interest rate cuts, rising rental prices and the phasing out of government incentives for first home buyers, we are likely to see an increase in new home ownership over the next few months.