The RBA Rate Cut

The official interest rate was cut by the RBA on Tuesday 4 June and this brings the cash rate down to 1.25 percent. It heralds an end to almost three years of unchanged rates.

What is behind the decision?

Put simply, the economy needs a boost. Annual inflation is at just 1.3 percent and the most recent inflation figure for the March quarter was zero. GDP forecasts are also rather bleak with the consensus at 0.4 percent for the March quarter, although the RBA’s outlook is for a slightly more optimistic 0.6 percent. Either way, it looks likely we will see the weakest annual GDP growth since the GFC.

Wages growth also remains stubbornly stagnant, growing at just over 2 percent annually, despite healthy employment levels.

The RBA has still forecast the economy will grow by around 2.75 percent in 2019 and 2020, supported by increased investment in infrastructure and rebound activity in the resources sector.

The key problem area is household consumption, which has been affected by ongoing low-income growth as well as declining home prices, effectively reducing overall wealth. It is hoped that this rate cut will boost disposable income and flow through to support consumer spending. It is also expected to assist employment growth and bring inflation in line with the medium-term targets.

How will this affect borrowers?

This depends on your lender. Commonwealth Bank and NAB have committed to passing on the rate cut to borrowers in full. Westpac and ANZ, however, will only pass on some of the savings to their customers, with ANZ citing increased funding costs.

Treasurer Josh Frydenburg met with each of the big banks prior to the RBA decision, to personally urge them to pass on to the public the full benefits of the 0.25 percent cut. He spoke out this week saying he was “deeply disappointed” after ANZ swiftly announced they would lower their interest rates by only 0.18 percent. “The public has a legitimate expectation that they will see the full benefit of rate cuts such as [this one],” he said.

SOURCES: ¹ https://www.rba.gov.au/, ² https://www.abc.net.au/news/2019-06-02/economic-slowdown-heading-to-gfc-levels/11166944