RBA drops cash rate to new low

The cash rate has now been slashed by a cumulative 75bps over the past five months, with the RBA also lowering rates in June and July.

The central bank has maintained that the monetary policy stimulus is aimed at supporting jobs growth and ensuring that the inflation rate closer to the RBA’s medium-term target of 2 to 3 per cent.

Market observers were anticipating the RBA’s decision in light of recent interest rate cuts from its foreign counterparts in the US and Europe.

Following the US Federal Reserve’s recent cut to its funds rate, AMP Capital’s chief economist Shane Oliver observed that it “reinforced” the need for further easing from the RBA in order to maintain downward pressure on the Australian dollar.

“On the one hand, the Fed’s easing, along with stimulus elsewhere globally, should help support global growth, which is good for Australia, [but] it’s probably not enough to change the outlook for the RBA and its perception that global risks have increased,” he said.

Mr Oliver added that he expects the Fed’s rate cuts to prompt an additional 25bps cut from the RBA in the coming months — taking the cash rate to 0.5 per cent.

The RBA’s decision to cut the cash rate for a third time has come despite evidence of a recovery in the housing market, which analysts have partly attributed to the RBA’s cuts in June and July.

CoreLogic’s latest Hedonic Home Value Index has revealed that national home values increased for the second consecutive month, rising by 0.9 per cent in September, following on from a 0.8 per cent increase in August. Reflecting on the RBA’s decision, CoreLogic’s head of research, Tim Lawless, said that the improvement in housing market conditions was offset by signs of further weakness in the labour market.

“A trend towards higher unemployment and a slowdown in jobs growth were likely the primary factors in the RBA’s decision to cut rates to a new low, as well as concerns around persistently weak household spending, subdued wages growth and low inflation,” he said.

All eyes will now be fixed on mortgage rates, with Australia’s lenders set to pass on the RBA’s cuts to home loan customers.

Managing director of mortgage aggregator Finsure John Kolenda has urged mortgage holders to take advantage of the low rate environment.

“Borrowers should be reviewing their home loan every time the RBA makes an adjustment to the cash rate,” he said.

“There’s no prospect of rates going up any time soon so this should be a shot in the arm for consumer confidence.

“With Christmas approaching, the domestic economy will lift if consumers have a change of heart and start spending again.”

 [Related: Home loan activity slows but set to soar]