What will another rate cut mean for you?

The Prime Minister last week joined the chorus of voices calling on the Reserve Bank of Australia to drop interest rates further, but it may not have been necessary – the general consensus by economists and financial markets is that we are heading for a cut in the 4.25 percent cash rate when the RBA meets tomorrow (February 7), even without politicians joining the fray.

A drop this month to 4 percent would be the third consecutive cut to the cash rate by the RBA, following cuts in November and December (the RBA does not meet in January).

“Our view is that the RBA will be cutting rates in February and March as well. Even though there are tentative signs of [economic] improvement, there is still a significant downside risk to the global outlook,” said Janu Chan, an economist with St George.

The RBA will make its decision based on two main factors: inflation and the prospect for global economic growth – or lack of – particularly in Europe, where gloom and doom continues to spread. Inflation data released by the Australian Bureau of Statistics on January 25 revealed that underlying inflation rose slightly to 2.6 percent, which was within the RBA’s 2-3 percent target but higher than expected.

On the release of the inflation figures, Treasurer Wayne Swan said: “With underlying inflation sitting squarely in the RBA’s target band, it does create room for further interest rate cuts into the future.”

Also last month, the International Monetary Fund (IMF) downgraded Australia’s growth forecast from 3.3 percent to 3 percent as a result of the ongoing European debt crisis.

St George’s Chan said weakness in the job market and housing market was also likely to influence the RBA’s decision to cut the cash rate. “Even though there are some signs of stability, such as a pick-up in housing finance, some other indicators, such as building approvals, have been weak,” Chan said.

“Consumer sentiment has also been quite low due to the economic outlook in Europe and concerns about job stability as well. The cuts in November and December have negated this somewhat, but there is still room for further cuts.”

Damian Smith, chief executive of RateCity expects there to be a big difference between what each lender will choose to pass onto borrowers – should there be a rate cut tomorrow.

“Smaller lenders are generally more competitive than the big banks, so they are likely to be more generous and will probably pass on more, if not the entire rate cut than the major shareholders of mortgages,” he said.

For instance, if you have a typical $300,000 home loan at 6.62 percent (the average basic variable rate of the major four banks) and you are given a 0.10 percentage point rate cut, your monthly repayments would be reduced by $20. If you were given a 0.25 percentage point rate reduction, your repayments would drop by $49 per month.

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