RBA pulls rate trigger

by Julia Corderoy03 Feb 2015
The Reserve Bank has announced a 25 basis point cash rate cut, bringing the official interest rate to a record low of 2.25%.

At its first board meeting of the year today, the RBA chose to cut the cash rate from its previous record low of 2.5% – where it was held for 15 consecutive months.

This decision may come as a surprise to some, as economists and analysts largely tipped the cash rate to remain on hold – for February at least. The monthly Reserve Bank survey compiled by finder.com.au found that 28 of the 30 economists and analysts surveyed expected the cash rate to remain steady at 2.5% today.

However, this was also the first time since August 2013 that the survey showed some panellists forecasting a cash rate change for next proceeding cash rate announcement. This was also the last time the cash rate moved; it dropped by 25 basis points to 2.5%.

Jessica Darnbrough, spokesperson for Mortgage Choice says last month’s disappointing consumer sentiment result combined with a recent spate of poor economic data ultimately forced the RBA to take action and cut the cash rate today. 

“Data from the Westpac Melbourne Institute of Consumer Sentiment found confidence grew by just 2.4% in January to 93.2, meaning pessimists still outnumber optimists by a significant majority,” she said.

“And it is not just consumer sentiment that is low. The latest Monthly Business Survey from National Australia Bank found business confidence is currently sitting well below long run averages.”

On the bright side, however, brokers and borrowers can brace themselves for lower interest rates.

“Moving forward, this latest rate cut should encourage many of Australia’s lenders to follow suit and trim the interest on their suite of home loan products. If lenders do pass on the latest rate cut in full we could expect to see more and more potential home buyers jumping onto the property ladder as they look to take advantage of the historically low rate environment.”

Tim Lawless, head of research CoreLogic RP Data says the rate cut is likely to bring the cost of mortgage debt to its lowest level since July 1968, which the Reserve Bank should be mindful of in the context of the housing market.

“Lower mortgage rates have the potential to add some fuel to what are already strong housing market conditions (dwelling values Australia’s capital cities have already increased by 19.6% since interest rates started falling back in November 2011),” he said.

“However, the stimulus from lower rates may not be as influential on housing market conditions as what we have seen in the past.”