Historic Move by RBA

On Tuesday, at its monthly board meeting, the Reserve Bank of Australia (RBA), has reduced interest rates, for the first time since August 2016, in line with predictions by many analysts and commentators, slashing it by 25 basis points from a record low of 1.5%, to a record breaking 1.25%.

There could be more cuts on the way; many economists predict this is the first of several more heading our way, and we could be looking at a second cut as early as August; as the RBA endeavour to kickstart the Australian economy that has been somewhat stalling domestically, with an increase in unemployment and underemployment, low wage growth, weak inflation, and tighter lending practices.

Global factors such as the uncertainty around Brexit, and the escalating tensions in US-China trading, are just some of the considerations that also contribute to influencing the RBA’s decision when looking at the ‘micro’ picture.

However, one thing that is uncertain at this early stage is how much of the rate reduction will filter down to mortgage holders; what percentage will the banks pass on to consumers? For this reduction to have any real positive impact on the economy, particularly the housing market, borrowers need to benefit.

If the banks do pass on most or all of the reduction, combined with APRA’s recommendations to lower the minimum interest rate buffer, meaning many buyers can borrow more; we should expect to see the market stimulated as a result.

Federal Treasurer Josh Frydenberg is believed to have personally asked Australia’s leading financial institutions to pass on the entire cut. We will have to wait and see…