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RBA considers cutting record low cash rate

RBA considers cutting record low cash rate

High unemployment, tapering stimulus payments, a sagging property market and a possible second wave of the pandemic will likely be front of mind when the Reserve Bank of Australia meets today to decide if an unprecedented rate cut should take place.

The cash rate, already at a thirty year low of 0.25 per cent, could be uncharacteristically cut by a fraction of the typical quarter-of-a-per cent, after Reserve Bank of Australia Governor Philip Lowe floated the possibility last month.

“Using international experience as a guide, it would have been possible to configure the existing elements of the RBA package differently,” he said, in an address to the Anika Foundation on July 21.

“For example, the various interest rates currently at 25 basis points could have been set lower, at say 10 basis points.”

A decision was made at the time to hold the cash rate -- a marker for the interest rates of unsecured loans held between banks -- with the Governor concluding the economic climate at the time didn’t warrant it.

The 0.25 per cent rate is at the RBA's effective lower bound, the proverbial floor on how low the rate could fall.

But a cut to a lower rate is still on the table if things change in the future, Mr Lowe said.

“The Board has … not ruled out future changes to the configuration of this (cash rate) package if developments in Australia and overseas warrant doing so,” he said.

Victoria’s entering into a Stage 4 lockdown following a second wave outbreak could be the change of circumstance that prompts the extraordinary move to lower the cash rate to another new low.

The lockdown will blow out the $3.3 billion that the pandemic was budgeted to cost, Treasurer Josh Frydenberg said on July 3, while there are concerns the second lockdown will devastate families, workers and small businesses.

The RBA board will announce their decision after meeting at 2.30pm today, July 4. Little is likely to change if the rate stays the same, but a drop could see a dip in variable home loan interest rates, provided banks pass on the cut.

Property, savings and more expected to plunge

The COVID-19 coronavirus has presented unique challenges to the global economy. In Australia’s capital cities, growth has generally been bucked and families have been financially squeezed.

About 21 per cent of Australian households have about $300 in savings, ME Bank’s biannual Household Financial Comfort report found. The amount is noticeably less than the current JobSeeker fortnightly payment, and its gradual tapering could leave them with what the bank described as a “savings cliff”.

The value of houses and apartments generally dropped across the country, data firm CoreLogic found. Melbourne property prices dropped 1.2 per cent in July, followed by a drop of 0.9 per cent in Sydney. The drop, the third consecutive on record since the COVID-19 coronavirus interrupted ordinary everyday life, did not offset strong yearly growth.

The economic fallout of the COVID-19 coronavirus is likely to financially scar generations, a Productivity Commision report found. The report studied the effects the Global Financial Crisis had on Australians and found 20 to 34-year-olds suffered irrecoverable setbacks in their careers, nor did they earn the same levels of income as the generations before them.

Authors of the report described the findings as “salient”, noting it offered an idea of the fallout from a COVID-19 recession.

Low rates lead to a refinancing rush

Borrowers are looking to take advantage of low interest rates by refinancing. A RateCity survey of 1009 people found 43 per cent of home loan borrowers are looking to refinance in light of COVID-19 and record low rates. 

The number eclipsed comparative findings from a 2018 survey, where just 19 per cent of borrowers were looking to refinance.

A RateCity analysis of RBA data found owner occupiers could save $2805 in their first year by switching to the lowest variable rate loan on the market, and $19,235 over five years -- including switching costs -- on a typical $400,000 loan.

“It’s taken a pandemic to get people to shift their mindset, but hopefully we’ll come out of it more budget-conscious and less complacent towards our mortgages,” Sally Tindall said, research director at RateCity. 

“The best way you can get a rate cut is to turn yourself into a new customer and switch. If you aren’t in a position to refinance, pick up the phone and try some old-fashioned haggling with your bank.

“The banks are pulling out all the stops too, putting some of the biggest cash back offers and rock-bottom rates on the table and adding more flexibility on fixed rate loans to attract new business – and it is working.”

Update, 2.40pm:The Reserve Bank of Australia has announced no change to the 0.25 per cent cash rate.

Governor Philip Lowe described the measure as “accommodative” and necessary given the tumult brought on by COVID-19.

“The Australian economy is going through a very difficult period and is experiencing the biggest contraction since the 1930s,” he said. 

“As difficult as this is, the downturn is not as severe as earlier expected and a recovery is now underway in most of Australia. 

“This recovery is, however, likely to be both uneven and bumpy, with the coronavirus outbreak in Victoria having a major effect on the Victorian economy.”

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This article was reviewed by Finance Writer Alison Cheung before it was published as part of RateCity's Fact Check process.

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