Masks on, scissors out: RBA cuts cash rate to 0.50%
- RBA cuts cash rate to new low in light of the global impact of coronavirus
- Easing correctly predicted by 15% (6/39) of experts due to sudden change of heart
- What a rate cut would mean for your mortgage repayments
3 March 2020, Sydney, Australia – Taking swift action in response to global and domestic markets, the Reserve Bank of Australia (RBA) cut the cash rate to an all-time low of 0.50% today.
The decision can be seen as a reaction primarily to the coronavirus, COVID-19, and its massive effect on global commerce.
In this month's Finder RBA Cash Rate Survey™ – the largest of its kind in Australia – 39 experts and economists made their predictions, with only 15% (6/39) correctly predicting the easing of the rate.
Finder surveyed the experts and economists between 20-25 February.
Graham Cooke, insights manager at Finder, said the reason that so many experts didn't foresee the RBA's March decision came down to timing.
"Today's cut may not seem unprecedented now, but just a few days ago, it did.
"To put in perspective how improbable this all is, last Friday, oddsmakers placed the chance of a 25-basis-point cut as less likely than when 15-year-old Coco Gauff beat Serena Williams in the first round at Wimbledon in 2019.
"What a difference a week makes," Cooke said.
Finder also asked experts about the likelihood of the ASX losing 10% by the end of the year due to coronavirus, and only half saw it as likely.
"By the time we had analysed survey results on Friday evening, the ASX200 had already lost 10%.
"That would be like if the average home lost $50,000 of value in a week.
"Nobody saw this coming," Cooke said.
Shane Oliver from AMP Capital, is one of the six experts who correctly predicted the cut this month and he doesn't think it will be the only easing of 2020.
"The coronavirus outbreak coming on the back of the bushfires is likely to see the economy go backwards this quarter which in turn is likely to push unemployment up further after the rise to 5.3% seen in January.
"Growth should rebound in the March quarter but given…we are so far from full employment and the inflation target, the RBA is likely to cut the cash rate again in the months ahead," Oliver said.
Even with the cut today, 18% expect the rate will get to 0.25% before 2021.
Cooke said it comes down to how well the virus is contained.
"An already weak economy is now under significant threat due to coronavirus. What happens now will likely depend on how fast it spreads, and to what degree Australian authorities can contain it.
"Remember, though, that even if the current spread of the virus does fizzle out, another – potentially stronger – wave is possible during the Northern Hemisphere's winter," Cooke said.
How much you could save
Cooke said every RBA cash rate cut is a blessing to borrowers and a punch in the gut to savers.
"While many lenders may pass on a cut to their customers, you may not see the full 25 basis point cut applied to your loan.
"Despite three RBA rate cuts in 2019 by a total of 75 basis points, banks passed on only 57 of those basis points to consumers, (19 basis points per cut) on average."
"If your bank passes on a partial cut of only 10 basis points, that could still save you $10,000 over 30 years on an average loan.
Potential rate cut savings if banks pass on a partial cut
"Keep an eye on your lender's website and digital channels to see how they are responding. If they aren't passing on the cut, it might be time to shop for a new home loan.
"However if your lender passes on the full 25 basis point cut, an average mortgage holder could save $25,000 over 30 years on their mortgage.
Potential rate cut savings on different loan amounts
Here's what our experts had to say:
Shane Oliver, AMP Capital (Cut): "The next move is likely to be a cut in either March or April. I don't have a strong view which one it is and it's not a big deal which one it is either. The coronavirus outbreak coming on the back of the bushfires is likely to see the economy go backwards this quarter which in turn is likely to push unemployment up further after the rise to 5.3% seen in January. Growth should rebound in the March quarter but given the uncertainty around COVID-19 and its impact globally there is much uncertainty around that and given we are so far from full employment and the inflation target the RBA is likely to cut the cash rate again in the months ahead."
Trent Wiltshire, Domain (Cut): "The RBA is reluctant to cut rates further as it is worried that house price rises will accelerate. But the soft labour force figures combined with the escalating shock from the coronavirus means the RBA will be forced to lower the cash rate."
Angela Jackson, Equity Economics (Cut): "The duel impact of the coronavirus and the summer bushfires have undermined the economic recovery of late 2019, and in the absence of fiscal stimulus the RBA will need to move to cut rates further. On balance I think there is enough information for them to move in March, but they may wait until April."
Tim Reardon, Housing Industry Association (Cut): "A reduction due to the adverse impact of restrictions on trade and tourism."
Nicholas Gruen, Lateral Economics (Cut): "Coronavirus will begin to weigh on our economy."
Dr Andrew Wilson, My Housing Market (Cut): "Jobless falling, wages growth still low and growing concerns over economic impact of coronavirus."
Nicholas Frappell, ABC Bullion (Hold): "The very slight rise in unemployment doesn't reflect the impact of bushfires or COVID-19. The slight weakening probably isn't enough to justify a cut considering 'the long and variable lags' referred to by the governor, and would leave scope for more cuts later if both of the above factors create persistent drag."
Alison Booth, ANU (Hold): "Although the prospects for the Australian economy are not looking good, I think the RBA will hold. In my opinion, the governments should be doing more in terms of fiscal policy and I suspect the RBA shares this view."
John Hewson, ANU (Hold): "Unsure of outlook and aware that int rate cuts do little to stimulate the economy except asset prices esp housing."
Malcolm Wood, Baillieu (Hold): "Sluggish growth and below target inflation."
David Robertson, Bendigo and Adelaide Bank (Hold): "Another RBA rate cut remains likely in H1, although the timing is subject to a range of factors that remain fluid. The latest jobs data was weaker than hoped, and COVID-19 global concerns are rising, so another cut is expected."
Ben Udy, Capital Economics (Hold): "We were already expecting the Australian economy to remain weak in 2020. The disruptions due to the coronavirus only add downside risk to that forecast. We think the unemployment rate will continue to rise, prompting the RBA to cut twice."
Peter Boehm, CLSA Premium (Hold): "I expect the RBA to hold rates for the time being. The economy would have to be facing serious problems if rates were to be reduced further and I don't think we're there yet – and hopefully won't be."
Craig Emerson, Craig Emerson Economics (Hold): "Not much ammunition left and the RBA considers fiscal policy should provide stimulus."
Mark Brimble, Griffith Uni (Hold): "The impact of ongoing national and global events is still being determined, while the economy continues to be largely stagnant, thus suggesting more support is required."
Tony Makin, Griffith University (Hold): "The weakness of the dollar combined with the metropolitan property market rebound suggest a hold decision at the March meeting. However, if COVID-19 is not contained, its impact on global supply chains significantly worsens (with domestic unemployment rising), a rate cut becomes highly likely in May, or even before, in April."
Alex Joiner, IFM Investors (Hold): "The RBA's challenge with respect to easing policy further is having to judge whether any near term uptick in the unemployment rate is due to the impact of the bushfires and coronavirus – which it may choose to 'look through' – or the beginning of more entrenched weakness in the labour market. Consequently it will want to see ample evidence of this in the data flow and may not get a clear signal until early in the second half of the year."
Leanne Pilkington, Laing+Simmons (Hold): "From an ease in the bushfire crisis to a rise in the coronavirus threat, there are economic challenges in addition to the health and safety challenges to be faced, and the impacts of these are not yet fully known. Maintaining the hold pattern at this time of significant uncertainty seems appropriate."
Mathew Tiller, LJ Hooker (Hold): "After releasing fairly upbeat meeting minutes last month, the RBA is now assessing the global economic impact of the coronavirus and domestic implications of droughts and bushfires before it reduces the official cash rate further. Real estate markets across the country continue to benefit from low interest rates with strong buyer demand resulting in auction clearance rates above 75% and a steady lift in dwelling values."
Jeffrey Sheen, Macquarie University (Hold): "RBA is likely to wait to see the effects on the economy of the recent natural disasters (fire, flood, epidemic)."
Geoffrey Harold Kingston, Macquarie University Business School (Hold): "Support economy in the face of the coronavirus."
Stephen Koukoulas, Market Economics (Hold): "It will want to guard against asset price rises."
John Caelli, ME (Hold): "The cash rate will likely fall in May as the RBA looks to get the unemployment rate lower. The uncertainty around the impacts of the coronavirus and weak consumer spending will also be factors."
Michael Yardney, Metropole Property Strategists (Hold): "The Reserve Bank will be disappointed with the latest unemployment figures but is likely to hold off cutting rates in fear of adding fuel to the already strong property markets."
Mark Crosby, Monash University (Hold): "RBA will likely cut this meeting or next as COVID-19 fears escalate. Subsequent moves will depend on how quickly this is brought under control."
Julia Newbould, Money magazine (Hold): "It will allow the RBA to assess the lag effects of the June cut from last year, but that all depends on the impacts of the coronavirus and the
Susan Mitchell, Mortgage Choice (Hold): "A further reduction to the cash rate is a question of when, not if. That being said, recent data suggests there may not be enough reason to warrant a cut in March as the benefits would not be sufficient enough to offset the risk of doing so. The latest Labour Force data from the Australian Bureau of Statistics (ABS) revealed that the unemployment rate rose in January, following better than expected results the month prior. Further, the December quarter Wage Price Index revealed that subdued wage growth persists. On the other hand, housing market data suggests the housing market continues to benefit from the historic low interest rate environment. The latest data from the ABS showed a rise in the value of home loan approvals in the month of December. Further, the low-interest rate environment continues to stimulate housing values, with CoreLogic figures revealing national dwelling values rose 0.9% in January. RBA Board members would be wary that another cut to the cash rate may put further upward pressure on the already high cost of housing."
David Lowe, Newcastle Permanent (Hold): "The RBA is likely to hold rates in March, allowing more time for the effects of its previous cuts to flow through the economy. The Board has noted the potential risk for lower rates to spur on increased borrowing and debt in the housing market at the time of an upswing, where the Australian household has only just started repairing balance sheets. A recent rise in unemployment may increase the chance of a rate cut sooner than previously thought, but not enough for a cut in March."
Jonathan Chancellor, Property Observer (Hold): "The central bank will want to sit and watch the economy for another month or two before cutting."
Rich Harvey, Propertybuyer (Hold): "RBA does not want to see property market over-inflated but waiting to see if past cuts will flow through and if lower AUD will stimulate exports."
Noel Whittaker, QUT (Hold): "I think rates have bottomed – there is so much uncertainty right now."
Nerida Conisbee, REA Group (Hold): "The biggest risk to economic growth right now is the coronavirus. If Chinese economic growth plummets for more than one quarter, this will hit the Australian economy. Already our tourism and education sectors are being hit due to their reliance on Chinese consumers. We don't have much room for movement with interest rates and if things start to get bad, we likely only have one or two cuts left. It is likely that May's federal budget will be far more interesting than last year and the government may need to give up their surplus."
Christine Williams, Smarter Property Investing Pty Ltd (Hold): "We are not due for a federal election for another 12 months, therefore the rise will occur at least 6 months prior."
Peter Haller, Treasurer (Hold): "There are downside risks to the RBA's current forecasts which, if crystallised, will bring forward a rate cut from the time currently expected by the market."
Mala Raghavan, University of Tasmania (Hold): "The recent unprecedented bushfire and the coronavirus outbreak means detrimental effects on the Australian economy. Trade, tourism and education sectors are the hardest hit. In addition, the global economic uncertainty and the gloomy world economic outlook, will drive down domestic household and business confidence and investments. Given these scenarios, there is a high possibility that the RBA will bring down the cash rate as low as 0.5% around July."
Clement Tisdell, UQ-School of Economics (Hold): "May hold till the effects of the coronavirus are clearer and fiscal policy is more apparent."
Other participants: Bill Evans, Westpac (Hold), Jason Azzopardi, Resimac (Hold)
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