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As Australia has recently experienced below trend growth and relatively high unemployment, the Reserve Bank of Australia decided to reduce the cash rate by 25 basis points at today’s board meeting.
The finder.com.au Reserve Bank Survey found that 53 per cent of the 34 leading experts forecast the cash rate to hold today. Whereas 47 per cent of the survey participants accurately anticipated a cut, including industry specialists from the Commonwealth Bank and Westpac.
While just six of these industry experts are predicting a further cut to the cash rate later this year, 63 per cent believe interest rates will start rising from as early as February 2016.
The Reserve Bank’s decision to ease monetary policy was made with the objective of fostering sustainable growth in demand and maintaining inflation within target.
This lowering of the cash rate has been a result of below-trend growth, high national unemployment and weak domestic demand.
With a high Australian dollar, few inflationary pressures and plummeting commodity prices, the Reserve Bank opted to slash the official cash rate to 2.00%.
By lowering the official cost of borrowing, the Reserve Bank hopes to bolster consumer and business confidence. That is, lower rates will mean that households have lower mortgage repayments which they hope will bolster consumer spending.
Despite today’s decision, finder.com.au money expert Michelle Hutchison, says borrowers should start preparing for future interest rate hikes.
"While most borrowers who have a variable rate home loan will be rejoicing in saving about $47 per month for an average $300,000 home loan from today's rate cut announcement, it looks like the party is over for more rate drops."
"Interest rate hikes are right around the corner. If you're not preparing now for higher costs, you could end up in financial trouble from next year.”
The finder.com.au Reserve Bank Survey found that the cash rate is forecast to rise to 4 per cent, meaning that variable home loan interest rates will average at around 7.10 per cent. This could have serious implications for mortgage repayments, with some borrowers paying up to $341 extra each month for an average $300 000 loan.
Mrs Hutchison wants borrowers to prepare for these future rate increases now by making more informed decisions and doing their due diligence: "There would be a lot of borrowers who are not factoring in this higher cost and will need to start preparing now to ensure they won't be under unnecessary pressure from next year by comparing home loans, asking their lender for a discount, switching to a cheaper deal and making fortnightly or weekly repayments rather than monthly."
When the Reserve Bank drops the official cash rate, this makes it more affordable for them to borrow money, meaning that they can lend out money at a cheaper rate. In effect, this means that you can borrow more, or spend less of your income on your home loan.
Find out what you should do if the rate is decreased
You can use our calculator to estimate how much your loan repayments may change after the official rate cut.
Simply enter the details of your loan, and you’ll see how the rate cut will affect your monthly repayments.
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