In its August meeting this afternoon the Reserve Bank of Australia has cut interest rates to a new historic low of 1.50% pa.
Inflation, inflation, inflation…. or lack thereof appears to be the motive behind the decision. The Consumer Price Index (CPI) is currently hovering around 1% and is well short of the 2-3% band that the RBA likes to target. As a result, most economists had tipped that an interest rate cut was on the cards, with many suggesting further cuts may be imminent.
There is now a real balancing act facing Governor Glenn Stevens. The more often interest rates reduce, the less impact each cut has on growth. The RBA is running out of ammunition to inject a bit of stimulus into a struggling economy.
Naturally a low interest rate setting is expected to result in more borrowing. Ordinarily, this would put more pressure on what many believe is an already overpriced housing market. Governor Stevens addressed this in his commentary pointing out that APRA, the banks regulator, has already implemented a number of changes that have subdued growth in some sectors. Anyone that has recently tried to borrow for an investment property or who earn foreign income will attest to that point. In addition, a large number of units under construction are expected to come onto the market over the next few years providing increased supply near capital cities.
With interest rates as low as they’ve ever been, there are no doubts it is a borrowers market. Most banks are reporting that their largest source of new business is in the refinance market with homeowners voting with their feet if they feel they can get a better deal elsewhere. CBA was the first lender to respond this afternoon and announce a 0.13% pa cut on their interest rates. It is expected that most lenders will respond in a similar fashion and not pass the cut on in full.
Tower Mortgage Broking are a professional Sydney based mortgage broker. For expert home loan advice on how today’s decision impacts your financial situation, contact us today.
Photography by Scott Lewis