Get set for a rate cut

While most of the nation punts their hard-earned cash on Australia’s biggest horse race tomorrow, the Reserve Bank of Australia is tipped to announce an interest rate cut.

With domestic inflation risks easing and the global economy looking perilously unstable, there is an increased likelihood the Reserve Bank will cut the cash rate by 0.25 percent when it meets for the second last time this year on Melbourne Cup day. The cash rate has sat at 4.75 percent for almost a year.

Speaking at an investment conference last week, RBA deputy governor Ric Battellino left the possibility of a rate cut wide open. “The downward revisions to recent estimates of underlying inflation and the softer global economic outlook have made the outlook for inflation less concerning, providing scope for monetary policy to be supportive of economic activity, if needed,” he said.

RateCity CEO Damian Smith said there was a 50 percent chance of a cut. “It’s still genuinely 50/50 as to whether rates will stay unchanged or fall,” he said. “But for the first time since 2009, the Reserve Bank has explicitly opened the door to rate cuts.”

If the RBA goes ahead with a rate cut to 4.5 percent, Smith predicted most lenders would pass on the 0.25 percent cut in full almost immediately in a bid to kickstart the market. “Remember, there were around 40,000 fewer first home buyers in the 12 months to September compared to the average of the last few years. That’s over $11 billion in borrowing that’s not happening.”

For the average homeowner with a mortgage of $288,300 and a variable rate of 7.11 percent, a 0.25 percent drop in interest rates would mean a saving of $46 a month, or $552 per year.

However, savvy homeowners who choose not to pocket the extra $46 can shave thousands off their mortgage in the long term. For homeowners currently paying the minimum on a $288,300 home loan ($2058 per month), maintaining their repayments at the same level could save them over $21,000 in interest over the life of their loan.

Borrowers looking for a fixed rate mortgage also stand to benefit, according to Smith.

“Since August 1, almost 90 percent of lenders have cut some of their fixed rates. Average three-year fixed rates are now 6.56 percent, and start at just 5.99 percent. Borrowers should be able to find fixed rates well below the average standard variable rates,” he said.

“Even if the benchmark basic variable rate goes down by 0.25 percent to 6.68 percent, there will still be 75 three-year fixed rate loans below that average.”

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