MY MONEY

What a Reserve Bank cash rate cut would mean for you

By

The odds of the RBA cutting rates have shifted

It doesn't seem that long ago that most economists were saying the next move in interest rates would be up. Given that the official cash rate is still at a historically low 1.5%, it was reasonable to assume they would gradually be lifted to more normal levels.

But a recent survey of finance experts by comparison site Finder found the majority now think rates will fall, with some saying they could be as low as 1% later this year.

Three-quarters of Finder's panel of economists and other experts believe there is at least one rate cut on the cards this year. Some predict two.

what an rba rate cut would mean for you reserve bank

The most likely months for rate cuts were said to be August and November, though Shane Oliver, chief economist at AMP Capital Investors, says the recent run of weak economic data has increased the risk that the first cut may be sooner - even as early as this month to get it out of the way before the election.

"Waiting for unemployment to rise runs the risk of being too late," he says.

Rate cut expectations were fuelled by March's weak growth figures. The economy grew by just 0.2% in the December quarter and 0.3% in September, leading to talk of a "per capita recession". In plain English, this meant what little growth there was could be attributed to the population getting bigger, not us all being a little better off.

Instead of needing to lift rates to keep inflation low as the economy grows, there are now concerns the RBA will need to cut rates to ease the effects of a slowing housing market and weak economic growth.

In its March statement, the bank was more upbeat, predicting growth to be around 3% this year, although it did note that some risks, particularly internationally, had increased. It said keeping interest rates low should help in both reducing unemployment and getting inflation back to above 2%.

What a rate cut would mean for borrowers

If you're struggling to pay off the mortgage or other debts with no signs of a wage rise, chances are that the idea of rate cuts sounds perfect.

Most of the major lenders have actually lifted lending rates by a small amount as credit has tightened due to the banking royal commission, though the RBA said in its February minutes that the effect has been partially offset by borrowers refinancing at lower rates. As competition remains strong, Finder says borrowers should shop around and consider refinancing if their home loan rate does not have a '3' at the front of it.

But you need to ask why the RBA would cut rates. If talk of an economic downturn proves correct, rate cuts may not be cause for celebrating after all. Higher unemployment, weaker consumer spending and a further slowing in the housing market are all on the cards if the economy does worse than expected.

What a rate cut would mean for investors

An official cash rate of 1% obviously won't come as good news to self-funded retirees and others with interest-bearing investments who are already struggling to get returns that keep pace with inflation, let alone beat it.

Graham Cooke, insights manager at Finder, says such investors need to consider options such as term deposits and alternative investments if they need to maintain their income.

AMP's Oliver says shares could also be volatile, though he expects decent returns over 2019 with China, Europe and Australia all looking to ease rates to stimulate their economies.

He says house prices are likely to continue to fall, thanks to tight credit conditions, more properties coming onto the market, reduced foreign demand and uncertainty caused by both the price falls themselves and potential tax changes by a Labor government.

RELATED STORIES

Annette Sampson has written extensively on personal finance. She was personal editor of The Sydney Morning Herald, a former editor of the Herald's Money section, and a columnist for The Age. She has written several books.
Comments
Don Dawkins
April 24, 2019 5.07pm

I read with interest your article on "What a Reserve Bank cash rate cut would mean for you" and as a self funded retiree, the future is of great concern. For example, if Labor is elected, then we lose the franking credit imputations, changes to capital gains on property and now the Reserve Bank potentially reducing rates with a flow on to bank saving accounts/term deposits rate being cut further. As for Superannuation, well that's another story on its own.
Don't know whether it's me misreading the future, but the Baby Boomers could be in for a difficult time.

Don in East Gippsland, Victoria.

Post a comment
Link to something L9mxnwoU