Interest rate cut shock waves.

Wednesday 08 May 2013

Article by Mozo

Home loan owners will be rejoicing over yesterday's news of the Reserve Bank of Australia's (RBA) decision to cut interest rates by 0.25 percent to a new record low of 2.75 percent. However the news is also highlighting a number of concerns.

Happy home loan owner

Until yesterday, the RBA's stance throughout 2013 has been to refrain from any adjustment on interest rates, choosing rather to observe the effects of the pervious 175 basis point reduction made between November 2011 and December 2012.

"The board had previously noted that the inflation outlook would afford scope to ease further, should that be necessary to support demand," said RBA governor Glenn Stevens.

The board chose to use that scope yesterday, seeing it neccessary encourage sustainable growth in the economy. The News Limited Network reported that a median outlook of data suggests that economic growth could fall below 3 percent in 2013.

But according to Treasurer Wayne Swan, the Reserve's outlook is "in no way similar to the picture at the height of the financial crisis."

It has also been suggested that the RBA are being drawn into a currency war and that yesterday's rate cut may have been a tactical move to bring down an over valued Australian dollar, which will be of major concern to businesses who are benefitting from the currencies strength, reports ABC news.

The Australian dollar dropped from 102.38 US cents, below 102 US cents just after yesterday's RBA announcement. 

And although home loan owners and the housing industry will welcome the rate cuts, there is no guarantee that Australia's major banks will pass the cut on to their customers. The average Big Four variable home loan rate has fallen by just 0.98 percent over the last 12 months in comparison to the RBA's 1.25 percent interest rate cut.

"With the bank's reporting bumper profits this month and wholesale funding costs back to pre-GFC levels, the Big Four have run out of excuses for not passing through the full rate cut to borrowers," Mozo's managing director, Rohan Gamble told the Property Observer.

Many lenders have already announced that they will pass rate cuts will be passed on in full, including 3 out of the Big Four banks. Mortgage holders can see if there bank passed on the rate cut in full on Mozo's Naughty or Nice table.

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