The Reserve Bank of Australia (RBA) has cut the cash rate to the record low of 2.50%, signalling the first time in an election cycle that they have done so since 1990.
What most of our experts have been saying is true, with the RBA lopping 25 basis points off the cash rate today, bringing it down to 2.50%.
Industry groups and analysts have been calling for the cut as mining investments appear to have past its peak.
While last rate cut was in May with the RBA saying that there was room for the stimulus, Michael Blythe, Chief Economist of CommBank says there is room for more.
“We think the door is open for another rate cut. They want to help the economy transition from a massive mining boom that’s coming off.”
Even if the RBA didn’t ease interest rate today, they will have the chance to cut again before the September 7 election, as the board meets on September 3.
Many experts have mentioned that today’s rate cut would not have the same impact on the Australian economy as it had before. “Inflation is still pretty low, there’s not much risk of over stimulating at the moment and it wouldn’t be a bad thing if the currency fell a bit further and I think another rate cut would assist with that,” says Warren Hogen, Chief Economist of ANZ.
“It would be helpful, people could say that all the rate cuts been made so far haven’t helped, but you can never really compare what the case would have been if they hadn’t done all those rate cuts.“
Michael Witts from ING Direct
Why the RBA should cut
While the economy is in a transition phase there is a risk that the setting of monetary policy and interest rates may over or undershoot. There is significant stimulus already in the economy, the impact of past rate cuts, the deficit budget position and importantly the lower exchange rate is providing further stimulus. On that basis it would be fine to leave rates unchanged but given the comments from the RBA earlier this week it appears that they are prepared to further stimulate the economy. However, the income effect of lower interest rates is often overlooked in the concentration on mortgage rates.
Who picked it?
Many Australian economists and analysts believed the RBA was going to cut by 25 basis points at today’s meeting.
Chief Economist for St.George, Janu Chan, said the RBA should consider factors like employment and inflation in their decision.
”The paid domestic end has been quite soft, inflation has been well contained and the unemployment rate hasn’t risen any higher. I think there is the room to provide the stimulus,” Ms. Chan said.
However, Property Observer Managing Editor, Jonathan Chancellor said that the RBA is not likely to cut for this month. “Although rising unemployment is the worrying harbinger of times ahead for Australia, the RBA will wait another month while talking to the markets while furthering ascertaining how the Australian dollar depreciation is doing the job of rate cuts,” he says.
“The retailers and home building industry certainly need a rate cut more-so than the established property sector.”
How does the RBA's decision affect you?
Jeremy Cabral, person finance expert at finder.com.au says while homeowners can celebrate potential savings, he questions if this generosity will be extended to credit cards or if consumers will remain hanging in the balance.
”Those aiming to secure their position in the property market are in an excellent place right now as a result of the current cash rate and I expect that a further drop today will have even more reconsidering their home finance options,” Mr. Cabral says.
“Credit card holders however, continue to remain uncertain about what a drop will mean for their pockets as the big four look unlikely to extend the decrease to these products.”
Term deposits and savings accounts may also not return the same amount as they originally did, pre-GFC.
Tell us: after today’s rate cut, are you encouraged to spend more?