Mortgage interest rates could fall to an unprecedented low if the head of the nation’s central bank acts on his strongest suggestion yet that the cash rate will be cut.
The Reserve Bank of Australia has held the cash rate at 0.25 per cent since an emergency meeting in March, an historic low not seen in the last 30 years.
But senior officials have been hinting at an atypical cut of 0.15 to take place at the next board meeting on 3 November, lowering the cash rate to an extraordinary new low of 0.10.
“When the pandemic was at its worst and there were severe restrictions on activity, we judged that there was little to be gained from further monetary easing,” began governor Philip Lowe, at Citi’s Annual Investment Conference in Sydney.
“The solutions to the problems the country faced lay elsewhere.
“As the economy opens up, though, it is reasonable to expect that further monetary easing would get more traction than was the case earlier.”
The cash rate influences the interest charged on variable mortgages and savings accounts. It is a marker for the interest rates of unsecured loans held between banks.
Economists predicted the rate would be cut earlier this month, but they revised their forecasts after considering the move would coincide with the release of the federal budget.
A growing number forecast the rate cut will take place on 3 November.
“(There’s an) expectation that the (RBA) Board is set to cut the overnight cash rate from 0.25 per cent to 0.10 per cent,” Bill Evans said, chief economist at Westpac.
“... Recently we have detected a change in attitude indicating more confidence that the plumbing of the financial system can operate effectively at an even lower set of policy rates.
“With that in mind and the commitment towards full employment and the target for inflation there seems to be no reason for the Board to delay its decision.”
Mortgages and the big four
Commonwealth Bank, Westpac and NAB did not pass on the most recent rate cut to their variable home loan customers. Only new customers signing up to their fixed rate mortgages benefited.
ANZ was the only exception; it passed on a cut of 0.15 per cent to variable rate customers.
|Date||CBA (%)||Westpac (%)||NAB (%)||ANZ (%)||RBA (%)|
But they have passed on cuts in the past. The big four passed an average cut of 0.86 per cent to existing customers since June 2019, but the cash rate had dropped by 1.25 per cent.
All eyes will be on the big four banks to see if they’ll pass any potential rate cuts to their customers, Sally Tindall said, research director of RateCity.
“Lenders have been aggressively cutting variable rates over the last six months, but by and large these cuts have been reserved for new customers, or people willing to fix their rate,” she said.
“With JobKeeper and JobSeeker being wound back, a growing number of Australian households are facing financial stress. In a time when every dollar counts, a mortgage rate cut of 0.15 per cent would save the average homeowner $33 a month.”
Save money on mortgages, earn less on savings
The cash rate doesn’t only influence the interest generated on home loans. Banks also use it to guide the interest calculated on savings accounts.
And the interest calculated on these accounts have been tumbling in line with the falling cash rate. A RateCity analysis of savings accounts over the last two months found 67 banks cut the interest rate -- including CBA, NAB, Westpac, ANZ and Macquarie -- by an average of 0.17 per cent.
“Any rate cut is likely to be passed on to the millions of Australians who have money in the bank,” Ms Tindall said.
“However with savings rates already hovering just above zero, many savers have already given up on the prospect of earning interest from their income.”