What's all this chat about an RBA cut?

Update 2:30pm, Feb 3: RBA has now cut rates by 0.25%!

You may have been hearing more noise than usual about this month’s Reserve Bank of Australia’s (RBA) meeting. The reason for this is because it appears we are now getting much closer to seeing a rate move by the RBA – something we haven’t seen in almost 18 months. Now that this talk has well and truly escaped the finance section and hit the headlines, the questions on many people’s lips are why is this and what does it mean for me?

Firstly, why does the RBA even move rates?

The RBA cuts rates if it wants to spark up the economy, or increases rates if it wants to calm it down. The idea behind this is if people have cheaper home loans (and other loans) they will spend the extra cash elsewhere, and if they get less interest on their savings account they are more likely to invest it elsewhere. Vice versa for a interest rate rise.

What is the current situation?

The current signs point to a struggling economy, both within Australia and globally. Locally, unemployment is not getting any better. There are a few conflicting data sources for this, but none of it looks too good and this is a general sign of a struggling economy.

There is also what has been dubbed the global “currency war”. Europe is pouring money into their economies to stimulate, Switzerland just stopped putting an artificial limit on their currency, Canada just cut their version of the RBA rate, Denmark is now negative 0.5 percent for their official rate – which has resulted in people paying money to put money in the bank and getting paid to have mortgage!

Closer to home, the Aussie dollar (AUD) has been relatively high for a while, despite recent drops. This makes it hard for our export (expensive for other countries to buy our stuff) and tourism industries (backpackers can’t afford our schooners) to compete, which puts a strain on the economy. The RBA reportedly wants the Australian dollar to sit around 75c US and it’s been heading that way on the back of expectations of an RBA cut. If there is no cut, it will likely bounce back higher, quite quickly. A low RBA rate can force the AUD down as it makes it less attractive for other countries to put their money into anything priced in our money.

BUT! There’s always a but…

A cut may make the investor property market go a little too wild, which is the last thing the already scarce first home buyers need in some states.

There is no doubt that Sydney and Melbourne are already “frothy”. Sydney has just finished two years in a row of double digit growth, more growth would continue to hurt affordability and if something goes up too much, it must come down – despite some parts of Australia somewhat defying this rule, so far.

Meanwhile the rest of the country is a mixed bag. There’s only one RBA rate, so they need to take it all into consideration.

Inflation – how quickly prices on everyday things increase – is another big factor the RBA looks at. In the recent figures this came in higher than expected. If people spend more, prices can increase quicker. If the RBA cuts rates then people may spend more, so RBA cuts can equal more inflation.

But like unemployment, there are a few different ways to measure it. “Untradeables” inflation is low, and this shows the RBA how much things cost that most Aussie’s choose to spend their money on, rather than the exported/imported stuff, like that iron ore you keep hearing about.

So it looks like inflation alone will not stop the RBA cutting rates as what we are spending money on isn’t getting more expensive too quickly. By the way, the RBA defines “too quickly” as anything more than three percent, as they aim to keep in between two percent and three percent.

In between all this RBA banter you may have noticed petrol getting cheaper. Retail petrol prices have fallen 32 percent since last July, which will save householders on average close to over $60 a month, according to a report by Fitch Ratings. For many people that’s a similar, if not larger, savings than would result from a rate cut. So even though a rate cut will help home owners, the fall in petrol prices will have a larger positive impact to everyday Australians. For the RBA, this means some of the job may already be in progress, so maybe they don’t need to cut. 

So will they cut?!

At this point it is too close to call, Sportsbet agrees. That’s right – in true Aussie form, you can punt on the RBA meeting. Despite the speculation and opinions being thrown around, this month it’s not much easier than trying to guess the Melbourne Cup winner in November. It really could go either way.

That’s all well and good, but what does it mean for me?

It might not happen this month, but it is looking very likely that it will soon. This will mean even lower home loan rates, but lower savings rates too. If you’ve got money in the bank, you’ll need to search hard for a decent deal, here’s a good start. If you’ve got a home loan, consider piling that extra money you save each month (if you’re on a variable rate) into the loan – your older and wiser self will thank you one day. Of course, make sure you’re on a good rate too – with around 0.80% difference between the the average variable rate and some of the lowest on the market, there are three free RBA cuts available for anyone who switches to one of the lowest rates.

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