RBA cuts official cash rate to 1.25%, but will lenders pass it on in full?

It’s been a long time coming, but the Reserve Bank Board has finally broken the interest rate deadlock by dropping the official cash rate to a new record low of 1.25% at this afternoon’s meeting in Sydney.

Rates had previously remained on hold at 1.50% for 30 consecutive meetings dating back to August 2016, but according to RBA Governor, Philip Lowe, weak inflation and employment figures finally forced their hand.

"The recent inflation outcomes have been lower than expected and suggest subdued inflationary pressures across much of the economy," he said.

"The central scenario remains for underlying inflation to be 1¾ per cent this year, 2 per cent in 2020 and a little higher after that."

"Today's decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target."

RELATED: Here’s what you can expect if the RBA cuts interest rates

Only months ago the RBA was making noises indicating their preference for an interest rate rise, but changed their tune somewhat recent reports.

According to Mozo Product Data Manager, Peter Marshall, a number of deteriorating economic indicators ensured that a cut became inevitable.

“Ultimately, given the state of the economy, the housing market and the latest CPI figures, it was only a matter of time before the RBA hit the button and implemented the cut.”

Lacklustre economic conditions had many tipping May to be the month the RBA finally cut, but it looks like the board wanted the federal election out of the way before making any moves.

Will home loan lenders pass on the full RBA cut?  

Now that the RBA has cut rates, focus will likely shift to whether or not home loan lenders pass on the full 25 basis point cut to borrowers and, if they do, how long it will take. 

But if the last rate cut was anything to go by, mortgage holders won't have much reason to be optimistic. Following the rate cut of August 2016, the Big 4 banks only passed on only 12-14 basis points to their customers, letting them pocket an extra $3.6 billion in revenue.

We’ll be tracking all the latest variable home loan rate changes, so check in with our Naughty or Nice table below to see if your lender is playing fair.

Many lenders have already slashed fixed home loan rates in the lead up to the RBA’s decision, and according to Marshall, they will almost certainly pass a portion of the cut on across other loan types as well, but it’s more likely to be half rather than the whole thing.

“We could be surprised and see some banks pass on the full 25 basis point cut, but I think it’s more likely that they pass on around 12 or 15 basis points,” he said.

“As for when, we will almost certainly see announcements from a couple of banks within 24 hours, but any actual rate cuts may take a couple of weeks to trickle through.”

To find even more great rates, head on over to Mozo’s home loan comparison tables where you’ll be able to compare a range of variable rate and fixed rate home loans as well as great deals for investors and first home buyers.  

Read last month's Reserve Bank interest rates update.

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