Good or Bad? What Does An Official Cash Rate Of 1.5% p.a Mean For Australia?

I would have loved to have been a fly on the wall of this months’ R.B.A rates decision to CUT the official cash rate down to a record low of 1.5% p.a. as no doubt there would have been some interesting discussions at the meeting.

Before the rate cut, just over half (23 of the 41) of the experts surveyed by financial comparison website finder.com.au believed that the Reserve Bank would, in fact, cut the official cost of borrowing today. We will now have to wait for the full board meeting minutes to see just how close this call was for the RBA members.

But what does that now mean for Australia, and Australians? Well, it depends on who you are and what you are trying to achieve?
At the end of the day, dropping rates is a clear cut sign that the Australian economy (like many other advanced and emerging economies) is facing some significant challenges right now.

It is undoubtedly BAD news for SAVERS or RETIREES many of whom have seen their returns decimated over recent years. This decision has seen many people dependent on fixed, or interest rate returns being forced into RISKIER asset classes just to get by. I genuinely fear for those who have worked hard their whole life, investing and saving for a certain level of retirement only to see the rest of the world seemingly conspire against them with massive Quantitative Easing & Ultra-Low Interest Rates.

However, what is not at all clear is exactly how the markets will react to the news of further rate cuts. The banks will no doubt be looking at how much of the rate they can pass on without eroding their profit margins. But will businesses and consumers take advantage of these all time low rates to borrow more & in turn stimulate the economy.? Or will this just rattle consumer confidence and lead to even lower inflation numbers for the RBA to deal with in the months, years, or even decades ahead?

Let’s quickly explore the possible thought processes and the economic data behind this months R.B.A decision:

1. INFLATION: Weighing heaviest on the R.B.A’s decision was perhaps the stubbornly low inflation rate. The June Qtr saw a headline inflation of 0.6 and annualised inflation of just 1.0 %p.a. Excluding volatile items sees the annualised inflation figure for June a little better at 1.6%. But this is still below the RBA’s target band of 2-3% p.a giving them scope to cut rates.

2. EXCHANGE RATE: The AUD has been trading uncomfortably high for the RBA at around US 75c before this rates announcement. However, no matter what the RBA does overseas forces will probably have a bigger impact on the AUD. Weaker than expected preliminary 2nd Qtr US GDP figure of just 1.6% against analysts expectations of 2.6%, and movements of the Yen, have kept the AUD higher than ideal for Australia’s export driven economy. However, if PMI data out of from China (due out tomorrow) disappoints, then the RBA will be hoping that this rates cut could just be enough of a catalyst to see the AUD dropping lower.

3. LENDING & HOUSING: Last years’ changes from the Australian Prudential Regulatory Authority (APRA) have had an impact on investor lending rates and conditions. The cooling housing market is obviously now not a major concern for the R.B.A given this rates decision (or the property market is at least the lesser of a few evils). Unlike the last cut which saw lenders pass the cuts on in full, the CBA have already announced that they will only be cutting lending rates for standard variable rates by just 0.13%. This will take the standard variable rate for owner-occupiers to 5.22 per cent. Not happy with interest rates in the 5’s, 4’s or even 3% range? Then give us a call (03) 8842 9399 or shoot us an email (info@thepropertymentors.com.au) because as a result of this announcement our members can now have access to Home Loan rates from as low as 2.00% p.a. for those who qualify.

4. EMPLOYMENT: The unemployment rate has been largely steady at around 5.7% but the RBA may be concerned about potential job losses moving forward caused by the winding up of some manufacturing jobs such as the automotive industry next year.

Confused by all the data?

Uncertain as to how to make big profits in these low growth, highly turbulent economic conditions?

Then why not call us and book a chat with one of our experienced Senior Mentors about where you are right now financially, where you want to be, and more importantly how to safely, confidently and predictably get the financial results you really want!

By | 2017-11-26T02:49:26+00:00 August 2nd, 2016|Capital Growth, In the news|Comments Off on Good or Bad? What Does An Official Cash Rate Of 1.5% p.a Mean For Australia?

About the Author:

Matt has had a long and varied career which has led him to become a highly sought after Property Mentor. Matt and his team currently have over $150 million worth of property under development, and have successfully taught hundreds of clients how to build a large property portfolio to suit their lifestyle.