The Reserve Bank of Australia (RBA) has cut the cash rate to the record low of 2.75%, signalling the lowest cash rate since 1960.
The RBA has given Australian mortgage holders a surprise gift by lopping 25 basis points off the cash rate today, bringing it down to 2.75%.
Governor of the RBA Glenn Stevens said the rate was cut to "encourage sustainable growth in the economy, consistent with achieving the inflation target".
He also said that while previous rate cuts had worked to stimulate interest-sensitive areas of spending, the exchange rate had changed little from it's 18 month high, while the demand for credit remained low.
Mr Stevens also pointed to the below trend global economy, making particular mention of China's more sustainable growth pace and the fact that the "euro area remains in recession".
Financial markets had the chance for a rate cut at just over 50%, due to a drop in retail sales, job advertisements and a low inflation rate.
Who picked it?
Many Australian economists and analysts believed the RBA was going to hold rates at today’s meeting, with only eight out of the 29 economists surveyed by Bloomberg forecasting a cut.
None of the economists from the big four forecast a rate cut and while some of the economists on our expert panel spoke about the RBA being close to a rate cut, it was only correctly picked by one of the economists.
Chief Economist for AMP, Shane Oliver, said the RBA would cut because of falling global business indicators, commodity prices and a weak response to past rate cuts, but was undecided as to if that would happen today, or next month.
‘...there’s been a patchy and weak response to rate cuts and other data in Australia has been soft outside of the homebuyer market and retail sector,’ Dr Oliver said.
‘The problem is we’re getting closer to the time when the mining boom is coming to the end.’
Commonwealth Bank’s Chief Economist Michael Blythe said the decision to cut rates would depend on more than just inflation.
’Low inflation readings for the March quarter mean that the door remains open to another rate cut and the bar to a further cut is lower,’ Mr Blythe said.
‘But whether the RBA walks through that door or jumps over that bar is less certain. The interest rate decision reflects more than just the inflation rate and its likely trajectory. There are, for example, indications that some of the interest-rate-sensitive sectors are responding to earlier rate cuts.’
How does the RBA's decision affect homeowners?
Jeremy Cabral, Publisher of finder.com.au says home owners should use this rate cut as a wakeup call to compare home loans on the market, consider refinancing to a better deal and save money.
‘Consumers can’t expect a loyalty bonus from their mortgage provider, they need to look after their own interests and switch providers if need be in order to make vital savings,’ says Mr. Cabral.
An Australian with a loan of $550,000 over 30 years at a rate of 6.50% p.a. is paying $3368.58 a month. By switching to a home loan with a rate of 5.70% p.a. they would pay $3088.32 a month.
This could save them $3,361.92 a year, which equates to $100,857.60 over the life of the loan.
Remember to follow our rate table to see the rate changes as they come in and if you have a mortgage with ANZ, check the table next Friday to see what they’ve decided to do.
Let us know what you think about the RBA cutting interest rates by posting your comments below.