The announcement of a 0.25% interest rate cut in August was very much expected by financial experts. But was this a move favoured by everyone?
In his speech at the Anika Foundation Luncheon, Glenn Stevens, Governor of the Reserve Bank of Australia (RBA) gave a clear indication that a rate cut was overdue.
‘One of the things we have been watching for as we have been reducing interest rates has been an indication of savers shifting portfolios towards some of the slightly more risky asset classes, as that is one of the expected and intended effects of monetary policy easing’ he said before the August announcement.
‘There are clearly signs of policy working in this respect, though not, to date, by so much that we see a serious impediment to further easing, were that to be appropriate from an overall macroeconomic point of view.’
While the news was welcomed by many, including finder.com.au’s expert panel, there were a few that didn’t benefit from falling interest rates.
Homeowners who have a variable home loan from a bank would have found another rate cut very favourable, as the RBA announces its eighth interest rate cut since November 2011. Existing homeowners are also now under favourable conditions to refinance, potentially saving thousands of dollars by doing so.
Australian exporters have also benefited from the falling Aussie dollar, after experiencing a high currency for the past several years.
While lower interest rates and a lower Australian dollar brings benefits from a global perspective, people that have saved large amounts of money in Australia don’t benefit from the rate cut. As investors are less inclined to save, it is assumed that the pressure will then be put into property, gradually pushing up prices negatively affecting those looking to tap into the property market.
Data from finder.com.au shows that even though more than 21 lenders passed on the rate cut in May for their home loans, eight banks also reduced their standard variable rate for their investment products, with an extra four in the following month of June - meaning that those looking to invest in term deposits were at a disadvantage. Four banks have already announced that they’ll be reducing their rates for August with more announcements expected in the following weeks.
Pensioners also, often rely on their returns from their previous investments, which means that the rate cut could have hit their assets hard.
Australian importers would also be disadvantaged from the falling Aussie dollar, though they have enjoyed the past five years of a high Australian dollar. However, there may be a point where the Australian dollar becomes so low that businesses are threatened.
Those who own a credit card would have also noticed that the generosity doesn’t extend to the interest they’ve been carrying around in their pockets. Historically though, credit cards have not followed RBA movements, with a tiny 0.05% being the biggest credit card interest rate drop from providers according to RBA official data.
The future of interest rates
While most experts believe that the previous rate cuts have had little or no impact, the results of the August rate cut are yet to be witnessed. If the current trend of unemployment and slow economic growth continues, then the lack of consumer confidence will eventually be, as Glenn Stevens puts it, ‘costly’ towards the Australian economy.
Australia has normally been an active importer of goods, so while exports should see an increase in their revenue from a lower currency, importers will see a decrease. In effect, imported goods sold in Australia could see a rise in prices and inflation which then could create pressure for interest rates to rise again. Though some sectors in Australia could use the stimulus, some sectors could do fine without it too.