Will the RBA drop rates lower?
Australian homeowners and prospective buyers alike are waiting in anticipation for another rate movement by the Reserve Bank of Australia (RBA). But will it happen this year or next?
Economists are saying it’s likely to happen this year, on the day one of Australia’s biggest sporting events – the Melbourne Cup.
In past years, the RBA hasn’t been distracted by the “race that stops a nation”. It has changed the cash each first Tuesday of November for seven consecutive years between 2005 and 2011. In 2012 the RBA ended a seven-year streak of reducing the cash rate on Melbourne Cup day by leaving the rate steady.
The speculation for this upcoming Melbourne Cup is mixed between lowering rates, leaving them at 2.50% and perhaps even raising them for the first time in three years. If a change does occur, then it will bring back the annual pattern of a movement on the day of this sporting event.
During its September meeting, RBA Governor Glenn Stevens stated the board will “continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target.”
What will happen if there is another reduction?
If another 25 basis points are cut this year, the level of housing affordability across the country would further improve. Repayments for a $300,000 mortgage would drop by $43 per month (if the loan was tied to a 4.75% p.a. rate instead of 5% p.a.). This could cover your internet connection each month, a pair of new shows or a case of beer!
Since the cash rate began it’s downward trend in November 2011, the average Australian mortgage holder is now saving hundreds of dollars on their monthly repayments.
What will happen if there is an increase?
If the RBA raises rates for the first time since November 2010, repayments for a $300,000 would increase $44 per month (if the loan was tied to 5.25% p.a. instead of 5% p.a.). This is of course assuming that banks and lenders respond as they usually do – by passing along the full rate increase to its customers. For those who are want to escape the uncertainty of where variable rates will head, they may want to look into fixing their interest rates.
What factors does the RBA consider in its decision?
Some of the factors that can influence the RBA’s decision include domestic economic growth, as well as international market trends.
The RBA board has stated that economic growth has been running “a bit below trend” for a number of months this year. This has been largely due to a slowdown in mining investments. A reduced level of mining investment activity has then led to unemployment figures slowly edging higher to 5.8% for August. If unemployment continues to edge higher, then it may trigger the RBA to reduce the rate further.
The level of inflation is another factor that can impact the RBA decision. One of the principal goals of enforcing monetary policy is to control the rate of inflation and keep it aligned with an inflation target, as set by the RBA. At the last few monthly meetings, the RBA stated that inflation has been “consistent with the medium-term target”.
Recent data from the Australian Bureau of Statistics found that the Consumer Price Index (CPI) rose by only 0.4% during the June quarter.
All of these factors, including international financial market performance, can affect what the RBA board decides for the state of the cash rate.Tags: interest rates, RBA, Rba Cash Rate, Reserve Bank of Australia