Finance Finance News Reserve Bank cuts cash rate to record low of 1 per cent

Reserve Bank cuts cash rate to record low of 1 per cent

RBA cuts interest rates
None of the banks has passed on the full amount of cuts since the current cycle in February 2015. Photo: Getty
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The pressure is on Australia’s bank and home lenders after the Reserve Bank (RBA) slashed official interest rates to the historic low of 1 per cent.

The RBA cut the official cash rate – the first time in 11 years it has cut in consecutive months – in another attempt to boost jobs growth, wages and inflation.

The RBA cut the official cash rate from 1.50 per cent to 1.25 per cent at its June meeting, and despite expectations it would wait until early August to cut again, it moved sooner, with another 25-basis-points cut at its meeting on Tuesday taking the cash rate to 1 per cent.

The last time the RBA cut the rate in consecutive months was in 2008 when it cut at five consecutive meetings from 7.25 per cent in August 2008, to 3.25 per cent in February of 2009.

A lender with a mortgage of $500,000 could expect to see about $74 shaved off their monthly repayments, or almost $27,000 across the life of a 30-year loan – assuming lenders pass on the full 0.25-point cut.

ANZ was the only of the big four to pass the 0.25 cut on in full, while NAB and CBA cut by 0.19 points, and Westpac by 0.20 points.

Four smaller lenders also acted on the RBA cut – Reduce Home Loans (-0.22 percentage points), Athena (-0.25), Resimac -(0.25) and State Custodians (-0.25).

Economist with Deloitte Access Economics, Nicki Hutley, said lenders were facing both social and financial pressure in their decisions on how much of the cut to pass on the customers – if any.

“I think they will be under pressure, after the Hayne royal commission [into the financial services industry] to pass on some of the cut, yes,” Ms Hutley said.

“But they are in an invidious position because they will also need to cut rates for depositors. The impact from the lower mortgage rates is much bigger, of course, but [deposit] rates are so ridiculously low that they don’t have much room to move.”

I would be surprised if it [the full 0.25-point cut] were all passed on.”

Martin North, principal at Digital Financial Analytics told The New Daily that banks risked killing off much of their deposit business if they cut savings rates much further.

“The banks get 60 per cent of their funding from deposits and if they took the deposit rate to zero they wouldn’t get any deposits,” he said. “They want to maintain their margin, but they are being squeezed, and it’s having an impact on their profits.”

Since the RBA began the current cutting cycle in February 2015, none of the big banks has handed all of the RBA’s rate cuts back to borrowers.

After the June 4 cut of 0.25 points, only two of the big four, CBA and NAB, passed it all on. The ANZ passed on a miserly 0.18 percentage points and Westpac handing on 0.2.

Graham Cooke, insights manager at Finder, said June’s 0.25 point cut – the first move in almost three years – may have been too small to make the desired impact and even a second may not be enough to kickstart the economy.

“The objective is to lower unemployment, boost wage growth and push inflation back to target. It’s clear that one cut isn’t enough.

“Frankly, two cuts might not be either, but it’s a step in the right direction and it’s great news for homeowners. It’s two down and maybe one or two more to go.

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