Interest rate cut to 1.75%

The decision by the RBA to cut rates to a record low of 1.75 per cent marks the first change since May last year.

The historic new low decided today was likely a hotly debated discussion according to Tim Lawless, head of research at CoreLogic RP Data.

“On one hand we have economic growth tracking at three per cent per annum, a housing market where the pace of capital gains is moderating in a controlled fashion and relatively strong labour market conditions.

“The big question relevant to the housing market is how much of the lower cash rate will be passed on to mortgage rates?

“The spread between the cash rate and standard discounted mortgage rate has been widening since 2008 when there was 1.8 percentage points difference between the two rates.

“By April 2016 the spread has doubled to be 3.65 percentage points and is likely to widen further if the full rate cut isn’t passed on by lenders to mortgage rates.”

Dr Andrew Wilson, Domain chief economist, says change to the rate indicates the RBA is acting to stimulate an under-performing economy.

“Although the recent tightening of bank lending conditions has contributed to weakening property price growth, low interest rates are continuing to support housing market activity, and remain a real positive for the property market,” he says.

“All eyes will be on the federal budget announcement this week, with housing markets sensitive to outcomes with regards to spending initiatives or possible public service job and service cuts, and changes to taxation policy.

“Lower official interest rates, if passed on by banks, is positive news for mortgage holders and prospective home buyers.

Mortgage Choice chief executive officer John Flavell says a spate of “less than impressive” economic data ultimately provided the RBA with the incentive it needed to cut the cash rate.

“Data from the Australian Bureau of Statistics found CPI fell 0.2 per cent over the March quarter, pushing core inflation down to 1.6 per cent – well below the Reserve Bank’s target range of 2-3 per cent,” he said.

“This was the first time since 2008 that we’ve actually seen a quarterly deflation result.

“Furthermore, the 0.2 per cent drop in CPI was a far cry from the 0.2 per cent rise that economists were expecting.”

Flavell says the sudden and surprising drop in CPI combined with the fall in consumer sentiment ultimately forced the Reserve Bank’s hand.

“According to the latest Westpac-Melbourne Institute of Consumer Sentiment, confidence fell 4 per cent to the point where pessimists now significantly outnumber optimists,” he says.

“Knowing this, it seemed the Reserve Bank had no choice but to cut the cash rate.”

What does this mean for you?

Borrowers are being warned to keep a close eye on rate cuts that are set to filter into the market as a result of the Reserve Bank’s surprise decision this afternoon.

Bessie Hassan, money expert at, says the new cash rate can pave the way for further savings, if you’re willing to do your homework.

“New figures show that inflation has dramatically slowed, growing by just 1.3 per cent annually, its lowest rate since the Reserve Bank began its inflation targeting activities,” she says.

“Even a small reduction on your home loan rate can save you thousands of dollars. Based on the average national home loan size of $357,200, a 0.20 per cent reduction from the average standard variable rate of 5.12 per cent to 4.92 per cent could save you approximately $500 per year or over $15,000 over the life of your loan.”

Currently on Canstar’s database the average standard variable mortgage rate is 4.77 per cent, says Canstar editor-in-chief Justine Davies. Considering the RBA’s reduction, and if the banks are to follow suit and cut home loan rates accordingly, the average standard variable home loan rate would drop to 4.52 per cent.

On a 25-year home loan, that would potentially make the following difference to monthly repayments:

Source: Canstar. Approximate calculation based on 25-year loan term.


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