The Reserve Bank of Australia (RBA) made history in the first week of October, slashing the official interest rate and signalling further cuts in the coming months.
What is the current interest rate?
The RBA dropped the official interest rate to just 0.75 per cent on Tuesday, 1 October. The first time the official cash rate has dropped below 1 per cent in Australia and the third rate cut since June.
Interest rates are significant in affecting the economy, which is why the RBA’s decision is so important. If interest rates are lower, it’s likely to encourage more people to take out a mortgage and purchase a property or take out a loan for home renovation.
Why did the RBA drop the interest rate?
In a statement issued after the call, the RBA said they made the decision to lower the rate in a bid to revive consumer spending, lift Australia’s otherwise stagnant wage growth, drive employment and provide greater confidence that inflation would be consistent with the medium-term target. RBA Governor, Phillip Lowe also noted trade conflict between the United States and China as a contributing factor.
“While the outlook for the global economy remains reasonable, the risks are tilted to the downside. The US–China trade and technology disputes are affecting international trade flows and investment as businesses scale back spending plans because of the increased uncertainty,” Lowe said in the statement.
“At the same time, in most advanced economies, unemployment rates are low and wage growth has picked up, although inflation remains low.
“Interest rates are very low around the world and further monetary easing is widely expected, as central banks respond to the persistent downside risks to the global economy and subdued inflation.”
Have the banks passed on the current interest rate?
So far, the big four banks have baulked at passing the official interest rate cut in full to consumers. Both the Commonwealth Bank and National Australia Bank (NAB) defied the RBA by refusing to pass on the cut in full just hours after the decision. The Commonwealth unveiled its mortgage rate changes, withholding 12 basis points from borrowers.
Treasurer Josh Frydenberg blasted the two banks for failing to pass on interest rate cuts in full, saying it was “very disappointing” and that “customers should vote with their feet.”
Reduce Home Loans cut interest rates by 0.20 per cent with the lowest variable rate currently at 2.69 per cent. Homestar Finance and Athena Home Loans both dropped 0.25 per cent, with variable rates at 2.74 per cent and 2.84 per cent respectively.
Will there be further rate cuts?
The RBA has suggested that another rate drop is expected to take place if the economy remains subdued, however when this might occur remains unclear.
“It is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target,” Lowe said.
“The [RBA] Board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.”