After weeks of speculation, the Reserve Bank of Australia cut the official cash rate by 25 basis points on Tuesday, the first cut in 18 months.
RBA Governor Glenn Stevens cited concerns about the state of the national economy as the reason for the historic new low of 2.25 per cent, as jobs, growth and consumer confidence continue to flag.
Treasurer Joe Hockey greeted the news warmly, saying: “The shackles are off the Australian economy!”
But for consumers to benefit, two key things need to happen: we all need to spend more, and the banks need to pass on the rate cut.
That’s according to The University of Sydney economist Dr Mike Rafferty, who describes the rate cut as “a blunt tool” that will hurt some while helping others.
If all goes according to the Reserve Bank’s plan, people with money in savings accounts and overseas travellers are likely to suffer while those already with home loans should benefit.
For renters or those with a variable home loan, the cut may provide “a little bit of relief”, says Dr Rafferty.
RateCity has estimated that the rate cut will put $47 per month back in the pocket of variable borrowers with a typical home loan of $300,000, if lenders choose to pass on the cut in full. The saving could be as high as $100 per month for borrowers in Sydney and Melbourne, where the average home loan is even higher, RateCity says.
If this happens, ASIC MoneySmart recommends that borrowers keep repaying the same amount, and thus pay down their debts quicker.
The average $400,000 home loan could be repaid one year quicker, with a saving of $15,000 in interest, if borrowers continue to make higher repayments, ASIC MoneySmart calculates.
But Dr Rafferty warns that more attractive borrowing rates may actually hurt, not help, those who intend to borrow or rent in coming months and years because more people will take out loans.
If the increased demand drives up house prices, then home loans will become more expensive, and landlords may be tempted to hike rents to earn a higher yield.
Superannuation and stock holders
In the wake of the news, the stock market hit a seven-year high.
Share prices may continue to rise because of extra consumer spending, cheaper business loans, and an attractive rate of return compared to the bond market. The weaker Aussie dollar also helps export companies, and thus their share prices.
Because super funds invest heavily in shares, Industry Super Australia policy analyst Matt Saunders says fund members may benefit from the cut.
“The interest rate cut should provide some stimulus to the wider economy which may in turn be reflected in stock market returns and increased returns to members’ superannuation balances, offset to some degree by lower returns on bank deposits and fixed term investments,” Mr Saunders says.
Savers will be the biggest losers, as rates fail to keep pace with inflation.
CHOICE campaign manager Erin Turner says both term deposits and savings accounts will be “less generous”, and advises that consumers keep a close look out for better financial products.
“Rate cut or not, it’s always a good time to shop around for a better savings account, a better term deposit, a better credit card,” she says.
“Typically, rate cuts are either not passed on or passed on very minimally to credit card holders,” says Ms Turner.
But CHOICE is pushing for the big four to do just that, pointing out that ANZ, CBA, NAB and Westpac are still charging around 20 per cent per annum on their credit cards.
The rate cut is bad news for anyone jetting off overseas, says Monash University Professor Jakob Madsen, an economist.
“It’s not good for those who travel overseas because the Australian dollar will go down further, and has already gone down, and that’s simply because the dollar is less attractive to investors.”
The effects will be worst for those buying US dollars, but a weakening Euro means those holidaying on the Continent will suffer less.