A rate cut is just around the corner, economists believe

September 26, 2019
Scissors Cutting

There’s a strong chance the Reserve Bank board will cut official interest rates for the third time in five months when it holds its monthly meeting on October 1.

A number of leading banks and commentators have forecast a rate cut in October, including ANZ, Commonwealth Bank, NAB and Westpac.

If that happens, the cash rate will fall from 1.00% – which is already a record low – to just 0.75%.

That would be a remarkable turnaround from November 2010, when the cash rate last increased.

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The RBA wants to stimulate the economy

Despite the doomsayers, Australia’s economy is in a reasonable position.

Unemployment is trending up, but it’s still at just 5.3%, which is below the long-term average. Inflation is low, at only 1.6%, but it’s not that far off the Reserve Bank’s target band of 2-3%. And after 11 years of large budget deficits, the government recently reported a small deficit of just $690 million for the last financial year (which works out to 0.0% of GDP).

So why do so many people expect the Reserve Bank to cut official interest rates yet again?

The minutes from the Reserve Bank’s last monetary policy meeting, on September 3, reveal that the board is concerned about several issues:

  • Slowing employment growth
  • Low wages growth
  • Weak consumer spending
  • China’s slowing economy
  • The US-China trade war

The Reserve Bank also believes there is “spare capacity” in Australia’s jobs market, because unemployment could fall without causing a dangerous spike in wages or inflation.

As a result, the board said it “would ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time”.

Translation: the board is open to cutting rates to stimulate the economy, thereby putting downward pressure on unemployment and upward pressure on inflation.

The big four banks might not pass on the full RBA rate cut

Don’t celebrate just yet if you’ve got a mortgage.

Even if the Reserve Bank does reduce official interest rates by 0.25 percentage points, the big four banks might not pass on the cut in full, because their profits have copped a hit from the succession of rate reductions over the past few years.

Here’s how the big four reacted to the combined cut of 0.50 percentage points in June and July:

  • ANZ passed on 0.43 percentage points
  • Commonwealth Bank passed on 0.44 percentage points
  • NAB passed on 0.44 percentage points
  • Westpac passed on 0.40 percentage points

However, a range of challenger lenders did pass on the full 0.50 percentage points. So if the Reserve Bank cuts again, it might be wise to think about refinancing away from one of the big four banks to a smaller rival. Quality mortgage brokers like X, Y and Z might be able to find you a comparable home loan at a lower interest rate.

One final point: it might be too early to fix your home loan. Some commentators believe not one but two rate cuts are coming. NAB, for example, has forecast cuts in both October and December.

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