RBA cuts interest rates to new low of 1pc amid slowing economy, prompting big four banks to respond

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The Reserve Bank has cut interest rates to an historic low of 1 per cent, as it stares down the twin issues of rising unemployment and a slowing economy.

Key points:

  • The RBA has made its first back-to-back rate cut since the European bank crisis in 2012
  • Governor Philip Lowe says the cut will assist in reducing unemployment and lifting inflation to the 2-to-3pc target band
  • ANZ, CBA, NAB and Westpac will pass on varying degrees of cuts to customers

The 0.25-percentage-point cut follows a move at last month’s meeting and is the first back-to-back cut since 2012, amid fears of a global financial meltdown flowing from European banks.

ANZ was the first major bank to react, announcing it would pass on the 25-basis-point rate cut in full to all of its variable home loan customers.

The Reserve Bank’s decision was largely expected, with the market pricing a roughly 80 per cent chance of a cut ahead of the RBA board meeting.

The odds of another cut had been shortening since RBA governor Philip Lowe told the market last month that one cut was unlikely to deliver the fall in unemployment the bank is looking for.

The Reserve Bank has recently indicated it views a 4.5 per cent jobless rate as close to full employment.

Unemployment has been steadily rising in recent months, from a trough of 4.9 per cent earlier in the year, and stood at 5.2 per cent in May, while GDP growth has fallen to just 2 per cent — the weakest reading since the immediate aftermath of the global financial crisis 10 years ago.

Dr Lowe today said that lower interest rates could help advance the RBA’s goal, and did not rule out further cuts.

“It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target,” he wrote in his post-meeting statement.

Interest rates at 1pc may be new for Australia, but not overseas

Interest rates at 1pc may be new for Australia, but not overseas

The RBA’s cut to 1 per cent is an extraordinary state of affairs here, but less so in other economies, writes Stephen Letts.

“The board will continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”

The Reserve Bank governor said international economic risks, especially from the trade war, also contributed to the decision to lower rates further.

“The outlook for the global economy remains reasonable,” Dr Lowe noted.

“However, the uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy are tilted to the downside.”

A lot of mortgage customers risk being ‘short-changed’

ANZ variable home loan customers did not receive the full 25-basis-point rate cut in June, with the bank criticised for only passing on 18 basis points, but they will receive this month’s rate cut in full.

“We looked at a number of factors before reaching this decision, including business performance, market conditions and the impact on our customers,” ANZ executive Mark Hand said.

“On balance, we believe this is the right decision for our home loan customers and for our business.”

Australia's big four bank logos: Commonwealth, National, ANZ, and Westpac.

Commonwealth Bank passed on 19 basis points to owner-occupiers and investors for principal and interest loans, and the full 0.25 per cent cut to its interest-only loans.

It also passed on a 0.15 per cent cut to NetBank Saver accounts.

“We have carefully considered how to respond to this latest official interest rate cut, given that it is not possible to pass on the full rate reduction to over $160 billion of our deposits, including deposits where interest rates are at or already near zero,” Commonwealth Bank’s Angus Sullivan said in a statement.

“We have made a deliberate choice to limit the interest rate reduction to 0.15 per cent per annum on our most popular savings account, NetBank Saver.”

NAB also announced a 19-basis-point reduction across the board on its variable home loan interest rates, following on from its 25-basis-point reduction in June.

Meanwhile, Westpac announced it was reducing variable interest rates for home loan customers, including a 20-basis-point cut for owner-occupiers and a 30-basis-point cut for investors with interest-only repayments.

RBA cash rate explained

RBA cash rate explained

ABC business reporter Michael Janda explains how the RBA’s cash rate affects the interest rate you pay on your home loan.

Interest rate comparison website RateCity calculated that today’s cut, if passed through in full, would reduce repayments on the typical $400,000 mortgage by $58 a month. Borrowers with a million dollar loan would save $144 monthly.

Combined with last month’s rate cut, those hypothetical borrowers could now be saving $1,389 and $3,472 a year, respectively.

RateCity’s research director Sally Tindall said many banks would hesitate before passing on this second rate cut in full — some banks chose not to pass on last month’s rate cut in its entirety.

“Banks are getting jammed between the competing interests of borrowers, depositors and profit margins,” she said.

“The reality is, a lot of variable rate customers might find they get short-changed by their bank on the back of today’s cut.

“Call your bank and find out what they intend to do.

“If you’re an owner-occupier paying down your debt, and you’re on a rate higher than 3.5 per cent after this cut, you might not be getting value for money.”

Hanging by a thread

Hanging by a thread

Jobs are about the only thing keeping recession at bay, but with unemployment rising, so are the risks.

Prior to today’s RBA move, a couple of large second-tier lenders were offering three-year fixed home loan rates for lower-risk owner-occupiers of 2.99 per cent.

On the share market, investors are concerned it is the banks that will be short-changed, with the big four all down about 1.5 per cent in late afternoon trade.

That is because as interest rates head towards zero, and competitive and political pressures push for most of the cuts to be passed on, investors are concerned that bank profit margins will have to share more of the pain with depositors.

The Australian dollar remained largely unchanged following the rate cut, because it was so widely anticipated.

Rates at record lows but ‘it doesn’t look like an emergency’

Even before today’s decision, Dr Lowe said a range of interest rates in Australia were at record lows.

“Long-term government bond yields have declined further and are at record lows in a number of countries, including Australia,” he observed.

“Bank funding costs in Australia have also declined, with money-market spreads having fully reversed the increases that took place last year.

“Borrowing rates for both businesses and households are at historically low levels.”

EMBED:RBA cash rate

However, National Australia Bank economist Ivan Colhoun said that did not mean there was a crisis in the economy, despite the cash rate being a third of what it was during the worst of the global financial crisis.

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume.VIDEO 3:02

NAB economist says RBA wants unemployment lowerABC NEWS

“We talk about emergency rates,” he told the ABC.

“In fact, very low rates are the norm around the world. Australia and New Zealand are coming to that normal a lot later than other countries.

EMBED:Central bank rates

“It may feel like an emergency. It doesn’t look like an emergency to me, with unemployment being where it is, with the share market being at all-time record highs.

“I wouldn’t consider it an emergency, even though they are the lowest rates we’ve seen in our lifetime.”

The scourge of negative equity

The scourge of negative equity

Mortgage delinquencies are on the rise, house prices are still tumbling and borrowers are falling into the quicksand of negative equity in their property. It’s bad.

Many analysts expect those record low rates to get even lower, with markets pricing in a better-than-50 per cent chance of rates being cut again by November.

Marcel Theliant from Capital Economics expects another cut in November and one more in March.

“The experience from housing downturns in Australia and other countries is that the economy requires additional stimulus even when house prices are already rebounding,” he said, noting a recent stabilisation in the Sydney and Melbourne property markets.

“We reiterate our forecast that the RBA will eventually slash interest rates to 0.5.”