RBA cash rate target announcement – October 2014

The Reserve Bank of Australia has decided this afternoon to follow the "same old story" and have kept cash rates on hold.

Cash rate decision

In a predictable move by Australia’s central bank this October 7, the official cash rate has maintained it lowest ever recorded, at 2.50%.

All of finder.com.au’s 28 experts agreed that the RBA’s ‘wait and see’ approach will continue until the end of 2014. When asked about the next interest rate change, all experts agreed that a rise was on the horizon, in an average of 8.26 months at a new normal cash rate of 4%*.

‘The RBA will leave the cash rate at 2.50% this month, sure as eggs’ says AAP’s Garry Shilson-Josling. ‘It’s the same old story – the housing market is still too hot to allow any serious thought of a rate cut, but the transition away from mining is too slow to bring rate rises back onto the agenda.’

While the housing market is performing strongly, other economic indicators are proving to be playing catch-up in order for the RBA to make a proper decision.

'The rest of the economy is sub-par, uncertainty remains high regarding how quickly the mining investment boom will unwind, inflation is benign and the Australian dollar remains too high all of which suggests it's premature to start raising rates,’ says Shane Oliver, Chief Economist at AMP.

'The most recent commentary from the RBA has indicated that a period of stability in rates remains prudent. This language is likely to be dropped well before the RBA starts hiking rates.'

What did the RBA say?

In it's statement, Governor Glenn Stevens highlighted that wider, international macroeconomic factors were taken into consideration. 'Growth in the global economy is continuing at a moderate pace' says the Governor.

'China's growth has generally been in line with policymakers' objectives, though some data suggest a slowing in recent months. Weakening property markets there present a challenge in the near term. Commodity prices in historical terms remain high, but some of those important to Australia have declined further in recent months.'

The RBA has admitted the favourable conditions regarding monetary policy, though interest rates 'have continued to edge lower over recent months as competition to lend has increased.'

Moving forward, continued accommodative monetary policy should provide support to the Australian economy overtime, aligning with the inflation target of 2-3% over the next two years.

Spring fever hits the property market

As the year 2014 enters into Spring, otherwise known as the ‘hot season’ for property, experts are concerned about the lack of supply for housing.

'The board will be keeping a keen eye on the data released in the first week of October, particularly in relation to building approvals and new home sales,” states Mortgage and Consumer Finance Expert, Lisa Montgomery.

‘The Board remain concerned in relation to their view of the Australian Housing Market being 'unbalanced' and the potential effect on future household spending. That said, the retail trade and private sector credit numbers should remain encouraging when released this week.’

What does the anticipated future rate rise mean to homeowners?

Assuming that the cash rate reaches the new normal of 4% (360 basis points above the current cash rate) this could have a $323,310 difference on a new home loan.

Original loan Original loan + 360 basis points
Interest rate (p.a.) 3.79% 7.39%
Loan amount $500,000 $500,000
Loan term 25 years 25 years
Total payments $774,466 $1,097,776
Saving of $323,310

Property buyers warned to prepare for tougher times ahead

Michelle Hutchison, Money Expert at finder.com.au, has warned that property buyers need to be cautious with their borrowing levels.

‘The good times for property buyers are not expected to last much longer, with our survey showing the next rate rise being forecast for June 2015, and a 21 percent chance that the cash rate will start rising from the first quarter of next year.’

‘If you’re an existing home buyer or hitting the property market this mortgage season, make sure you prepare a buffer for when interest rates rise. This is the time when you should be paying as much as you can on your mortgage, to lower the impact of higher rates.’

‘It’s also a good time to compare home loans online and find a better deal because a small discount can make a big difference to the cost of your loan.’

*Average of new normal cash rate predicted by finder.com.au’s 28 cash rate experts.

Shirley Liu

Shirley Liu is a program manager at finder, formerly the publisher for Banking and Investments. She is passionate about helping people make an informed decision, save money and find the best deal for their needs.

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