RBA maintains current cash rate at 2.25%
Although consensus maintained that another cash rate cut was on the horizon, many economists predicted that the Reserve Bank would maintain the cash rate this month. With 75% of RBA experts expecting the cash rate to remain on hold, it comes as no surprise that today the Reserve Bank confirmed this speculation.
At today’s meeting, the Board decided to maintain the current cash rate of 2.25%, while they assess the impact of the rate cut earlier this year. However, Glenn Stevens claimed that further easing of policy may be required in the near future to create sustainable growth in demand and to meet inflation targets.
finder.com.au's money expert, Michelle Hutchison also provided insight into the Reserve Bank’s decision to maintain the cash rate: "Today's decision by the Reserve Bank to leave the cash rate unchanged at 2.25% is great news for first home buyers, as lower rates have led to higher consumer confidence and increasing property prices”.
According to Stevens, "economic growth is continuing at a below-trend pace, and with weak domestic demand and higher unemployment, the economy is operating with spare capacity". As employment rises, it is likely that inflation will remain within the 2-3 per cent target range.
With low capital expenditure, another rate cut would stimulate economic growth. However, the Reserve Bank has decided to hold off from cutting rates this month in fear of fueling the strengthening Australian property market.
Why keep the cash rate on hold?
As many predict another rate cut in the near future, it is believed that the Reserve Bank will wait until May or June to issue a further rate cut to boost consumer confidence. With moderate national employment, capital expenditure and inflation at 1.7%, it is believed that a further rate cut will be inevitable over the next few months.
Money expert, Michelle Hutchison confirms: "The latest finder.com.au Reserve Bank Survey found that there is likely to be a cash rate cut in the next few months and that will likely be the bottom of the cycle. However, the majority (67%) of the 42 experts are forecasting interest rates to start climbing by as early as the first quarter of next year. The cash rate is expected to rise to about 3.75%, which is another six 0.25 percentage point rate increases and will take the average variable home loan interest rate to 6.75%. For a $300,000 home loan, that would cost an extra $289 per month in mortgage repayments (from $1,657 to $1,946).”
It is believed that the Reserve Bank has decided to keep the cash rate on hold to optimise downward pressure on the Australian dollar.
As the Reserve Bank prefers to coordinate its monetary policy decisions with the Consumer Price Index data, due to be released later this month, they are able to buy some time before slashing rates further.
As the Australian economy is at risk of further fueling property prices, the Reserve Bank will maintain the current cash rate to assess the impact of the last rate reduction on Sydney’s housing market.
The Reserve Bank is anxious about encouraging a lack of capital lending in the face of a depreciating currency.
Housing market concerns
In recent times, record low mortgage rates have fueled an already strong Australian housing market by driving up property prices. Recent data from the Australian Bureau of Statistics (ABS) suggests that first home buyers have been struggling since 2011, with just 5 963 first home buyer loans being financed in January this year.
Money expert, Michelle Hutchison stated: "The finder.com.au Reserve Bank Survey in December 2014 showed the majority of experts are expecting property prices to rise as a result of rate cuts this year so first home buyers can breathe a sigh of relief, for now.”
Credit has achieved moderate growth, with stronger growth in lending to investors in the housing market. Dwelling prices continue to rise strongly in Sydney although trends have varied across a different regions in Australia. Michelle Hutchison confirms: "The past year saw the median property price increase by 7.4 percent to $559,000 (CoreLogic RP Data). If first home buyers have to borrow over $38,000 more for an average property – from $520,484 to $559,000 – the higher property price would outweigh the last rate cut. In fact, even if there was another cash rate cut, it won’t outweigh the extra cost in monthly repayments if you paid $38,000 more for a property.
How low interest rates affect you
As we are now seeing some of the lowest cash rates over the past two decades, this low interest environment makes it cheaper for lenders to borrow money, so they can lend out money at a cheaper rate. In turn, this means that people can borrow more, or spend less of their income towards their home loan. However, it is important to note that there are numerous economic factors, apart from interest rates, that may affect your financial situation.
- Homeowners: Generally, low rates will see your monthly mortgage repayments decrease. On a variable loan of $300 000 over 30 years, with a rate of 5.9% p.a., a 0.25% rate cut could see your repayments drop by approximately $48 each month.
- Home buyers: As rates are lower, the cost of a home loan when you find a property will be less. However, a cut in the official rate can see a rise in demand as many choose to enter the property market as borrowing costs are less. This can drive up property prices and increase competition which can make it difficult for you to secure your property.
- Credit card holders: Credit card interest will fluctuate based on the type of purchase made and the consumer’s history. Not all credit cards will be subject to changes in the national cash rate, as it will depend on the lender.
- Savers: Interest rates are a major incentive to open a savings account as this contributes to the value of your savings over time. Unfortunately, low interest rates will affect how much money consumers are able to accrue through term deposits and standard savings accounts.
- Investors: Bondholders will also be negatively affected by low interest rates as it means the value of their long term investment is diminished, which will reduce their return on investment.
Despite lower rates leading to lower mortgage repayments, Michelle Hutchison warns that consumers must research different home loans to find the best offer: "There is still a huge difference in what lenders are offering, and on the pointy end it is very competitive. For instance, variable home loans start from 4.23% (by Loans.com.au). Lenders are also competitive and keen to sign up new customers so it's worth doing your research, find out how your home loan compares to the rest of the market, ask your lender for a discount or switch to a cheaper deal."