D-Day nears for RBA at May meeting: Here’s what you can expect if rates are cut
Friday 03 May 2019
It’s no secret, speculation is well and truly building that the RBA could cut the official cash rate at next Tuesday’s May meeting by 25 basis points from 1.50% to 1.25%.
If that were to happen it would break a remarkable rate deadlock that goes all the way back to August 2016 when the Reserve Bank Board last dropped rates.
According to the ASX’s RBA Rate Indicator as of May 2, there was a 44% expectation that the interest rates would be cut to a record low 1.25% this month - a figure which has been hovering close to the 50% mark since unimpressive quarterly inflation figures were released last month.
Not all commentators are convinced that the RBA will make a shift just yet though, with Mozo Product Data Manager, Peter Marshall, suggesting that they may hold off for another month.
“CPI has been below the RBA’s target band of 2-3% per annum for an awfully long time now, and the March quarter result of no increase has prompted many pundits to bring forward their expected timing of a rate cut to May,” he said.
“I don’t think that’s going to happen though. I think that they’ll wait to see if the official unemployment rate stays steady, and they’d prefer not to move until after the Federal election. While May can’t be taken out of the equation, I think they’re more likely to move in June or even July.”
What will an RBA cut mean for me?
Whether the RBA makes a move on rates next Tuesday, or in June, the consensus among financial experts is that a cut is coming. So if it does, what will it mean for different groups of Australians?
Will the banks pass on an RBA rate cut in full? That’s the million dollar question many mortgage holders and would-be-borrowers will want an answer to, but according to Marshall, they’re likely to be disappointed.
“There’s some pressure following the Royal Commission so we could be pleasantly surprised and they could pass on the rate cut, but I think it’s more likely that they’ll keep somewhere around half of it for themselves,” he said.
“They might pass on 12 or even 15 basis points to borrowers but keep some for themselves as they try to make up for increased costs and lower volumes of new mortgages.”
Even if lenders only pass on a partial cut, Australians can still expect some home loan relief.
For example, the current average variable home loan rate in the Mozo database for an owner occupier making principal and interest repayments on a $400,000 loan with an LVR of 80% is 4.36%.
Let’s say homeowner Rhianna currently has a $400,000 loan with a 4.36% variable rate (based on the same parameters as above). According to Mozo’s Home Loan Repayments Calculator, Rhianna would currently be making monthly repayments of $2,192.
However, if her bank dropped the rate to 4.24% (12 basis points), her monthly repayments would drop to $2,165 or $27 a month lower!
Unfortunately for Australians trying to boost their savings, the fallout from an RBA rate cut is likely to be less pleasant.
In fact, over the last few months the Mozo database has already recorded an uptick in the number of term deposit rate cuts, with the best one year, two year and five year term deposit rates all dropping in April alone.
And according to Marshall, savings accounts won’t be spared either.
“The banks won’t hesitate at all to pass on the full 25 basis point RBA cut on to savers, so the at-call rates that we see at the moment are unlikely to exist in the near future,” he said.
“Savers might want to think about locking in a term deposit rate sooner rather than later as there are still some decent rates to be found."
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Want to get up to date with the latest banking rates before Tuesday’s RBA meeting? Make life easy by using Mozo’s handy comparison tables to compare home loans, savings accounts and term deposits today!