Surprise 50 point interest rate cut by RBA

The Reserve Bank has slashed the official cash rate by 0.50%. Effective May 2nd, the cash rate now sits at 3.75%.

Whilst a cut at today’s meeting was all but guaranteed, the magnitude of this afternoon’s announcement was a big surprise from the usually very conservative RBA. This softening of inflation, central to monetary policy setting has allowed a significant cash rate decrease to support demand.

RBA Governor, Glenn Stevens explained the decision in reference to the slow growth of the world economy, below trend growth in domestic output and the decline of underlying inflation.

Why it was 50

Quoting Gov. Stevens: “A reduction of 50 basis points in the cash rate was, in this instance, therefore judged to be necessary in order to deliver the appropriate level of borrowing rates.”

Based on recent behaviour by the banks (read: ANZ) it had been opined that in order for the RBA’s decision to have any impact on the price setters in retail bank land, a cut of more than 0.25% would be necessary. This proved to be true.

What will the banks do

Whilst the outcome of today’s board meeting was easy to predict, what happens next is not.

Last month ANZ made clear that they are no longer setting rates at the behest of the central bank, increasing their variable home loan rates by 6 points despite no change to the official cash rate.

As ANZ trail-blazes into the new paradigm of Big Bank independence (and cops a huge amount of flak on the way) the rest of the industry is free to ride the abstract blue-man’s wake. Don’t be surprised to see little change in rates until after ANZ’s official review next Friday.

The stage is set, however, for some of the more aggressive-minded bankers to pass a big chunk of the 50 point cut, and to do it quickly.

What the cut means for you

If you are a home owner holding your breath for your bank to pass on the full 50 point cut, we expect many of you will be turning blue before long. That said, there is certainly more room for movement in the unexpectedly large rate cut so it will be a very interesting few weeks.

Currently NAB-backed UBank tops the home loan market, with the UHomeLoan offering the best comparison rate of any variable product @ 6.23%

The savers out there may be better placed, as the war for your hard earned cash rages on. Since November, cuts by the RBA have not been matched by slides in headline savings rates – a signal to just how important the deposits market is for the lending market.

Again UBank leads the savings market, with the USaver account topping out at 6.01% and the same rate for a 6 month term deposit.

The Mozo Rate Chasers will report on all the rate changes as they happen, so keep checking back for our famous “Naughty or Nice” table.

Read last month's Reserve Bank interest rates update.

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