All eyes are on the Reserve Bank of Australia (RBA), as the central bank prepares to make its latest decision on monetary policy.
While the bank meets on Monday and Tuesday to discuss the direction of the official cash rate (OCR), economists and lenders are weighing in on what a possible rate cut could mean for borrowers, the housing market and the broader economy.
"If rates get cut, then there's going to be some hype around people reviewing their rates, people being able to afford to spend more," Adelaide-based broker Bechara Boutros told Australian Broker. "[A rate cut] might create a bit of hype around what people can spend. It might create a bit of a reaction where people are going to reach out to their lender, their banker, their broker, to have a conversation around, 'hey, how does this impact me?' And it's obviously going to stimulate people who haven't reviewed their rate, or can't be bothered reviewing their rate, or who thought initially that they couldn't get a better rate. You would hope it would stimulate them to have a conversation and go out there and do micro research around [things like]: is my rate still suitable? Can I get a better deal? What's the rest of the world doing compared to what I have?
"But it's so subjective to the individual, or the couple, or the household, or someone's financial position," said Boutros, who works at Loan Market Vantage. "So reduce rates doesn't in every single case, assume that you can go and spend more money. It depends on the person."
The RBA held rates at 4.10% during its April meeting, much to the chagrin of mortgage holders and investors nationwide.
But all four of Australia's Big Four banks are anticipating a rate cut Tuesday thanks to easing inflation and steady employment levels. They're just split on how deep the cut will be. Commonwealth Bank (CBA), ANZ and Westpac are also eyeing a reduction of 25 basis points, while National Australia Bank (NAB) has made a bolder prediction of 50 basis points.
"They're likely to cut rates 25 basis points. But given that the global environment does seem a bit more settled than what it was back in early April … I don't think there is a need for them to cut 50 basis points …unless things really deteriorate from here," said Madeline Dunk, an economist at ANZ. "If you think about the local environment, it still looks pretty good. And that quarterly inflation data that we had out for Q1, that doesn't give the [RBA] any need to rush with a 50 [basis point cut]."
But regardless of the exact percentage points, the majors aren't alone: a growing number of market players believe the RBA has enough evidence to begin easing monetary policy.
"The economy is still a bit soft and monetary policy is still restrictive, so the RBA has got good reasons to cut the cash rate," said Saul Eslake. The Hobart-based economist is forecasting a 25 point basis cut on Tuesday.
Fueling the shift is the nation's mean inflation, which fell to a three-year low in April, and within the RBA's target inflation band. April data also revealed that Australia's unemployment rate held steady at 4.10%, indicating what could be the first signs of an easing labor market.
Meanwhile, both consumer and business confidence have been on the upswing in recent weeks, thanks to lower fuel costs, recovering global markets and future rate cut expectations. The Westpac–Melbourne Institute Consumer Sentiment Index rose 2.2% to 92.1 in May, while the ANZ-Roy Morgan Consumer Confidence Index was up 0.8 points to 88.3 the same month. The NAB Business Confidence Index moved to -1 in April, up from -3 in March.
Further rate cuts would likely lead to more optimism. In fact, even a small rate cut would likely act as a psychological nudge, prompting borrowers to reassess their options — whether it’s refinancing or jumping into the market.
Bluestone chief commercial officer Tony MacRae said the non-bank lender's lodgement volumes were higher in the last week of February and first week of March, than any other time during the company's 25-year history, following the RBA's February rate cut.
"It was only a 0.25% cut," MacRae said. "But what it did was give people confidence that the rates are not going to keep rising."
Still, some economists have warned that moving forward, the central bank will exercise more caution.
Eslake pointed to previous comments by RBA governor Michele Bullock — about how the bank will tune out market noise in favor of the facts — as proof.
"Their decisions in this uncertain environment will be guided by what the data says, not by speculation about what the data might say," Eslake said. "So the likelihood is not so much that the [US] Fed or the RBA will put rates up or down. But it's probably more likely that they won't do anything until a clearer picture emerges.
"If they cut rates, it will be because Australian inflation, as [the RBA] looks at it, is back in their target band, and they have confidence that it will remain in their target band," he said. "It won't be because they fear a recession is coming because of things that are happening in the US or China."
Still, it's hard to ignore what's happening in other parts of the world, and how they may impact life in Australia. Global economies around the world were on edge in early April when US President Donald Trump unveiled a sweeping round of tariffs — dubbed the Liberation Day tariffs — which tacked on a blanket 10% import levy to all countries globally, including Australia.
The news rattled global markets and reignited recession fears, pushing up expectations of sharper, faster RBA cuts. But then news of a truce between the US and China prompted some economists to rethink their calls. Now, the market is on edge, eagerly watching for the next move and weighing how the tariff tensions will ripple through Australia’s economy and if they will shape the RBA’s response.
"When you have a look at what the Reserve Bank would be looking at now, it's obviously what's happening in the Australian economy: things like the inflation rate, unemployment and the GDP is really important," said Nerida Conisbee, chief economist at Ray White. "But when they're looking forward, probably the main thing that the [RBA] will be looking at is that the world economy is slowing; the trade war is leading to a slowdown."
