Will the RBA cut interest rates in February?

Niko Iliakis

Tuesday 28 January 2020

The Reserve Bank’s February meeting is just around the corner, and while it seemed like a pretty fine-balanced decision for a few days, the chances we’ll see the cash rate cut to 0.50% have dropped significantly.

That’s because last week brought some good news. The latest round of jobs data, released Thursday, showed a decrease in unemployment from 5.2% to 5.1% — the lowest it’s been since April 2019.

Ahead of Thursday the market was pricing a February cut at 58%. That number plummeted to 19% a day after the jobs data was released.

But things aren’t all so rosy. Along with the usual bugbears of inflation and unemployment, the RBA also has to consider the bushfires that are currently raging across NSW and Victoria, the economic costs of which have been estimated at over $100 billion.

What’s the outlook for the economy?

While stability has returned to the property market - thanks largely to last year’s three rate cuts, relaxed stamp duty requirements and the rollout of the first home loan deposit scheme - it’s hardly flowed through to other sectors of the economy.

So is any talk of a rebound premature? Perhaps. Decreased construction activity, low consumer confidence, and a less than impressive Christmas trading period suggest there are plenty more challenges ahead.

“Retail is still struggling, even if the headline figures aren’t too bad. We’re seeing a lot of businesses shutting down and big chains going out of business or massively reducing their number of stores,” said Mozo’s banking expert, Peter Marshall.

To his credit, RBA Governor Philip Lowe has long acknowledged the limits of rate cuts, emphasising that as long as the government continues to keep the lid tight on fiscal policy, the main outcome will be inflated property prices.

This has led many to question the RBA’s efforts. With household debt at record highs, Australians will likely direct any savings from rate cuts towards their mortgages, rather than pouring it back into the economy.

“Consumer confidence is still very depressed. It’s been falling and seems to have been made worse by the bushfires. People have been tending to hold on to whatever money they can,” said Marshall.

How will banks respond if the RBA moves?

Whether the RBA pulls the lever next week or a later date, we expect banks to react to react the same way. According to Marshall, banks will likely pass on only a portion of the cut to their variable home loan customers.

“What we saw last time around was the banks passing on somewhere around half the cash rate reduction, and I think that will be the pattern for the next cut and the one after that.”

Back in October of last year, when the RBA decided to reduce official interest rates to 0.75%, lenders tracked by Mozo hacked an average of 0.15% off their range of variable rate home loans. Only three lenders - Athena, Homestar and UBank - passed on the full 0.25% cut.

As for savings accounts, they’ve taken quite the hit in the past year, and another rate cut will leave them looking even worse for wear. If you’re looking for somewhere else to keep your savings, visit our term deposit comparison page, or browse the selection below.

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