Tag: RBA

Brokers On The Boil?

Broking groups have reported a spike in borrower enquiries following the Reserve Bank’s decision to slash the cash rate to a new record low, via The Adviser.

On Tuesday, the Reserve Bank of Australia (RBA) cut the official cash rate for the first time in almost three years, dropping the cash rate by 25bnps to 1.25 per cent.

Several lenders, including the big four banks, have passed on the rate cut partly or in full to mortgage customers, which according to broking franchise groups Mortgage Choice and Loan Market, has triggered an “influx” of borrower enquiries.

Andrea McNaughton, Loan Market’s executive director of growth, told The Adviser that the broking group received an overwhelming response from clients after informing them of changes in the interest rate environment via a marketing campaign.

“I think it’s been an exciting few weeks, a lot more confidence has returned to the market and I think the trifecta was Tuesday, with the announcement of a cut,” Ms McNaughton said.

“We’ve sent out a text message and an email campaign to our client base, simply saying, ‘great news about the interest rate reduction this week, let’s chat so we can tell you what this means for our loan and how simple our process is to review – message me back and let’s get the ball rolling’. 

“We had about 12 response to that in 20 minutes to see brokers.”

Mortgage Choice CEO Susan Mitchell also reported a sharp uptick in borrower enquiries, from both refinancers and those looking to secure a new loan.   

“A number of brokers received calls from their existing customers, who had heard news from the media and their family and friends about low interest rates, with many new enquiries originating from referrals,” she told The Adviser.

“Brokers have said a number of customers had called asking if they can get a rate below 4 per cent, particularly investors who had been holding back on their property buying plans.

“Interestingly, some brokers have reported an increase in enquiries from customers wanting to exit a fixed-term and while it isn’t always economically feasible, there are lenders offering competitive deals.”

Ms Mitchell said that the spike in enquires has also been evident among first home buyers (FHBs) that were previously hesitant to enter the property market amid uncertainties.  

“Brokers have also reported an increase in enquiries from first home buyers who feel more confident about taking their first steps towards home ownership,” Ms Mitchell said.

“Some have attributed this sentiment to a change in the political climate, others put it down to the news around lower interest rates and falling property values.”

The rise in borrower enquiries following the RBA’s monetary policy adjustment was also reflected in an analysis from comparison website Finder.com.au, which reported an unprecedented 654 per cent increase in traffic to home loan deals within 48 hours.

According to Finder, interest in variable rates grew by 564 per cent, while refinancing enquiries spiked by 369 per cent.

However, despite the uptick in enquiries following widespread cuts to mortgage rates, tighter lending conditions have inhibited borrowers from easing their mortgage burden, at least according to new research from S&P Global Ratings.  

Ms McNaughton acknowledged the challenges, but said she expects the Australian Prudential Regulation Authority’s (APRA) proposed changes to home loan serviceability guidelines to improve access to credit.   

“I think we’re all hoping that that will ease a bit now [that] APRA has made that decision,” the Loan Market executive said.

In the meantime, Mortgage Choice CEO Susan Mitchell encouraged brokers to capitalise on the growing demand for finance.

“As sentiment turns, brokers should take the opportunity to reach out to those in their database who have made an enquiry in the last few months,” she said. “Check in with them, find out where they are on their property buying journey and remind them that you are here to guide them.”

She continued: “Similarly, it is paramount you communicate with your existing client base and ensure their needs are still being met. Invite them to do a home loan review to ensure they are getting a competitive deal and ask them if their loan is still meeting their needs.

“This will be particularly important to those customers whose lender has not passed the rate cut on in full.”

Ms Mitchell also urged brokers to use the opportunity to promote their brand to strengthen their client base.    

“For brokers out there, who do not have a database, take advantage of the positive sentiment in the market. Increase your local marketing efforts, boost your profile – even if it means hitting the pavement, shaking hands in your local area and introducing yourself as the local home loan expert,” Ms Mitchell concluded

The Banks Respond To The Cash Rate Cut

The big four all announced cuts in their variable mortgage rate (around 75% of borrowers are on variable rates), but the amount of the cuts and the timing does vary between banks.

Both the RBA Governor and The Treasurer on the record said the banks should pass through the full cuts. Borrowers should shop around and demand a better rate – which is always good advice!

The funding position of the banks, as represented by the BBSW is also supportive of a pass though.

Analysts were expecting about half to pass through, which would be neutral to profits, thus, those who pass through more will see their margins compressed, and it is certain they will cut deposits rates to alleviate this. Funny how deposit rate cuts are hardly reported, and never make the headlines.

As a rule of thumb, a 5 basis point net margin reduction translates into a 1% fall in profit.

One problem is that many call deposits are close to zero now, so expect a bigger trimming of term deposit rates. We also expect some savers to pull funds from deposits to try other investments with a higher return, though with higher risks.

This is how the majors came out:

ANZ

Their Australian variable mortgage rates to decrease by 18 basis points, which is 7 basis points lower than the RBA 25 basis point cash rate cut. This will be effective from the 14th June.

CBA

Their Australian variable rate home loans will decrease by 25 basis points. This will be effective from 25th June. Given their better systems this is a deliberate delay in my view, to protect profits.

NAB

Their Australian variable rate home loans will decrease by 25 basis points. This will be effective from the 14th June.

Westpac

Their Australian variable mortgage rate will decrease by 20 basis point, though its Investor interest-only home loans will reduce by 35 basis points. This will be effective from the 18th June.

Generally investment mortgages now carry a higher mortgage rates than owner occupied lending of course.

Regionals and smaller players already have margin pressures and competitive disadvantage to cope with, yet they will have to keep their rates in line with the market to maintain new and existing business flows.

We are entering a diabolical phase in our interest rate history, and this signals ongoing economic weakness.

The RBA Will Cut Again, And AGAIN

From The Conversation: The Reserve Bank cut interest rates on Tuesday because we aren’t spending or pushing up prices at anything like the rate it would like. And things are even worse than it might have realised.

As the board met in Martin Place in Sydney, in Canberra at 11.30 am the Bureau of Statistics released details of retail spending in April, one month beyond the March quarter figures the bank was using to make its decision.

They show the dollars spent in shops fell in April, slipping 0.1%, notwithstanding weakly growing prices and a more strongly growing population.

The March quarter figures the board was looking at were adjusted for prices. They show that the volume of goods and services bought, but not the amount paid for them, fell in seasonally adjusted terms during the March quarter.

Adjusted for population, the volume bought would have fallen further.

We’ll know more on Wednesday

The Bureau of Statistics will release population-adjusted figures as part of the national accounts on Wednesday.

The figures for the September quarter show that income and spending per person barely grew. The figures for the December quarter show income and spending per person fell.

A second fall in the March quarter will mean two in a row – what some people call a per capita recession.

Australian National Accounts

Even unadjusted for population, economic growth is dismal.

During the September and December quarters the economy grew just 0.3% and 0.2% – an annualised rate of just 1%.

That’s well short of the 2.75% the treasury believes we are capable of, and the lower than normal 2.25% it has forecast for the year to June.

Australian National Accounts

We’ve been doing it by ourselves. As Reserve Bank Governor Philip Lowe said in announcing the rates decision on Tuesday:

The main domestic uncertainty continues to be the outlook for household consumption, which is being affected by a protracted period of low income growth and declining housing prices.

The bank wants both inflation and employment higher, and it wants us to spend more in order to do it. Lower rates should help, although not for everybody.

Lowe acknowledged this is a speech to a Sydney business audience on Tuesday night, but he said households paid two dollars in interest for every one dollar of interest they received. So while rate cuts hurt savers, they benefit borrowers by more, and over time should benefit all households by boosting the economy. They also drive the dollar lower, making Australian businesses more competitive.

Tuesday’s cut should free up an extra A$60 a month for a typical mortgage holder. Another one will free up a total of $120.

It’s not much, and there’s doubt about whether it will do much, but interest rates are about the only tool the Reserve Bank has.

It is required by its agreement with the government to aim for an inflation rate of between 2% and 3%, “on average, over time”.

Treasurer and Reserve Bank Governor, Statement on the Conduct of Monetary Policy, September 19, 2016. Reserve Bank of Australia

Uncomfortably for Governor Lowe, underlying inflation (abstracting from unusual moves which are quickly reversed) has been below 2% ever since he was appointed governor in late 2016.

Explaining his push for higher inflation to a business audience in Sydney on Tuesday night he said that while adherence to the target was intended to be flexible, that flexibility was “not boundless”.

If inflation stays too low for too long, it is possible that inflation expectations move lower – that Australians come to expect sub-2% inflation on an ongoing basis. If this were to happen, it would be harder to achieve the medium term inflation goal. So we need to guard against this possibility.

He is also required to aim for full employment.

He told the business audience that while for some years the bank and others had thought full employment meant an unemployment rate of 5%, the absence of inflation at 5% and the persistence of underemployment (where people wanted more hours) meant it could and should go lower.

Our judgement now is that we can do better than this – that we can sustain an unemployment rate of 4 point something.

Lower interest rates should help by making it easier to businesses to borrow to expand, and giving consumers something in their pockets to buy from them.

If you don’t succeed…

If that doesn’t happen, the bank will cut again.

Tuesday’s statement as good as said so:

The board will continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time.

Tuesday’s cut and the next will take the bank into uncharted waters, where its so-called cash rate – what it pays to banks to deposit money with it overnight – is close to zero.

As far as can be discerned it has never been that low in the 100+ years the Reserve Bank has been in operation, originally as the Commonwealth Bank of Australia.

Reserve Bank cash rate since 1990

Reserve Bank of Australia

Should inflation still not pick up and employment still not fall as far as it believes it could, it will have to effectively cut its cash rate below zero, forcing cash into the hands of banks by aggressively buying government bonds, giving them little choice but to lend it to households and businesses, in a process known as quantitative easing. It has been done in the United States, Europe, the United Kingdom and Japan, and is by now anything but unconventional.

Governor Lowe would prefer the government to pull its weight by cutting tax and boosting spending, especially on infrastructure, and by policies that make Australia more productive.

He said so on Tuesday night

the best approach to delivering lower unemployment and a stronger economy is through structural policies that support firms expanding, investing, innovating and employing people. As we ease monetary policy, it is in the country’s interest that other policy options are considered too.

Treasurer Josh Frydenberg gets it.

He pointed out on Tuesday that the yet-to-be-approved tax offsets in the budget will give Australians on up to $126,000 a cash bonus of up to $1,080 when they submit this year’s tax return, far more than the rate cut.

His biggest concern, and the biggest concern of the governor, might be that they don’t spend it. Another concern would be that the banks don’t pass the rate cut on.

The ANZ has said it will only cut mortgage rates by 0.18 points instead of the full 0.25, a decision Frydenberg said “let down” customers. Westpac has cut by only 0.20 points. The National Australia and Commonwealth banks have passed on the cut in full.

On Tuesday night in Sydney Governor Lowe addressed the question of whether the banks should have passed on the full cut head on:

My usual practice in answering this question has been to explain that there are a range of other factors that influence mortgage pricing, and then say “it all depends”.

Today, though, I would like to break with my usual practice and provide a clearer answer. And that is: Yes. There has been a substantial reduction in the cost of banks raising funds in wholesale markets. Average rates on retail deposits have also come down.

This means that the lower cash rate should be fully passed through into standard variable mortgage rates. Full pass-through would also mean that the economy receives the full benefit of today’s policy decision.

The Governor is concerned that, for their own reasons, lenders such as ANZ and Westpac are forcing him to cut rates lower than he should and making an already difficult job harder.

If he has to cut further he will, but with the cash rate at just 1.25%, he would dearly love not to have to.

Author: Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

The RBA On The Cash Rate Cut

Governor Lowe explains. In summary: Expect more cuts. Banks should pass on the cuts. Borrowers will benefit more than savers in the interests of the economy. The exchange rate will fall. Spare capacity in the economy needs to be utilised.

At its core, today’s decision was taken to support employment growth and to provide greater confidence that inflation will be consistent with the medium-term target.

I want to emphasise that the decision is not in response to a deterioration in our economic outlook since the previous update was published in early May. The economic outlook remains reasonable, with the main downside risk being the international trade disputes, which have intensified recently. The Australian economy is still expected to strengthen later this year, supported by the low level of interest rates, a pick-up in growth in household disposable income, ongoing investment in infrastructure and a brighter outlook for the resources sector. So today’s decision does not reflect a weaker outlook. Rather it reflects the fact that, even with the expected pick-up in growth, the Australian economy is likely to have spare capacity for a while yet.

Today’s easing of monetary policy will help us make further inroads into that spare capacity. It will assist with faster progress on reducing unemployment and will help achieve more assured progress towards the inflation target. So that is our rationale.

I know that many of you are likely to have questions about today’s decision. I would like to take this opportunity to provide answers to some of your probable questions. I am also happy to answer your other questions after my prepared remarks.

The four questions that I thought it would be useful to answer are the following:

  1. Why did the Board act today, after having held the cash rate steady for more than 2½ years?
  2. Are there more interest rate reductions to come?
  3. Should today’s reduction be fully passed through to mortgage rates? and
  4. What about the savers – has the Board forgotten about them?

First, why move now, after holding steady for so long?

The answer is the accumulation of evidence. As you would expect, the Board is constantly sifting through masses of data and seeking to understand what are often conflicting signals about the economy. As we have gone about this task over recent times, there has been a progressive accumulation of evidence in support of two conclusions.

The first is that inflation pressures are subdued and they are likely to remain so.

And the second and related conclusion is that there is still significant spare capacity in the Australian labour market.

The most recent batch of data has provided further evidence in support of both conclusions. The March quarter CPI was low and it was below expectations, as was the previous reading on inflation. In addition, the wage data for the March quarter confirmed that wages growth remains subdued, although it has picked up from a year ago. And the recent labour market report also confirmed that strong employment growth is not making material inroads into spare capacity in the labour market. The Board judged that the accumulation of this further evidence meant that it was now appropriate to adjust monetary policy.

Given the importance of these two conclusions, I would like to elaborate a little on them and explore their implications.

The subdued inflation pressures reflect a number of factors. These include slow growth in wages, increased competition in retailing, the adjustment in the housing market – with rents increasing at the slowest pace in decades – and various government initiatives to reduce the cost of living pressures on households. These factors are all putting downward pressure on prices and they are likely to remain with us for some time yet.

Collectively, these factors have contributed to delayed progress in returning inflation to the 2–3 per cent target range. In underlying terms, inflation has now been below 2 per cent for three years and the latest reading was 1½ per cent. Looking forward, inflation is still expected to increase, but it is unlikely to be comfortably within the 2–3 per cent range for some time yet. So the progress on returning inflation to target is more gradual than we had hoped.

It is important to remember, though, that our inflation target is intentionally flexible and that the Australian economy has benefited from this flexibility over the past 25 years. The Board is aiming to ensure that Australia has an average inflation rate of between 2 and 3 per cent over time. The focus is on the average and the medium term.

We have never sought to have inflation always between 2 and 3 per cent. The RBA adopted flexible inflation targeting before other central banks, and this flexibility has served us well. It has allowed the Board to set monetary policy so as best to achieve its broad objectives, with the ultimate aim of contributing to the economic prosperity and welfare of the people of Australia. It has also allowed the Board to look through temporary factors affecting inflation.

This flexibility, however, is not boundless. The point of our inflation target is to provide a strong medium-term anchor that helps deliver low and stable inflation, which, in turn, is an important precondition to sustainable growth in employment and incomes. If inflation stays too low for too long, it is possible that inflation expectations move lower – that Australians come to expect sub-2 per cent inflation on an ongoing basis. If this were to happen, it would be harder to achieve the medium-term inflation goal. So we need to guard against this possibility.

Moving on to our conclusion about spare capacity in the labour market.

For some years, most estimates of full employment, including our own, equated to an unemployment rate of around 5 per cent – it was thought that if unemployment went below that for too long, inflation would rise and become a problem. But, given the combination of the labour market and inflation outcomes we have seen of late, our judgement now is that we can do better than this – that we can sustain an unemployment rate of 4 point something.

It is also worth noting that the supply side of the labour market is turning out to be more flexible than we had earlier expected. The recent evidence is that when jobs are there, more people join the labour force and other Australians stay in work longer. Reflecting this, the participation rate is currently at a record high, despite demographic shifts that we anticipated would reduce participation. It is also the case that people are prepared to work extra hours when there is strong demand for their labour. Together, these observations support the conclusion that there is still spare capacity in the labour market and this is likely to remain the case for a while yet. The recent data have given us more confidence in this assessment and we have responded to this.

Over the past few years, one concern has been that lower interest rates could add to the medium-term risks facing the Australian economy as a result of high household debt. We need to keep a close eye on this issue, but this concern has receded recently. Lending practices have been tightened considerably and many lenders have become quite risk averse. The demand for credit has also slowed due to the changed dynamics of the housing market and slower income growth. So the risks on this front look to be less than they were previously.

This brings me to the second question: are interest rates going to be reduced further?

The answer here is that the Board has not yet made a decision, but it is not unreasonable to expect a lower cash rate. Our latest set of forecasts were prepared on the assumption that the cash rate would follow the path implied by market pricing, which was for the cash rate to be around 1 per cent by the end of the year. There are, of course, a range of other possible scenarios and much will depend on how the evidence evolves, especially on the labour market.

If you accept the argument that a sustainably lower rate of unemployment in Australia is achievable, the question that we should all be thinking about is: how do we get there?

It is possible that the current policy settings will be enough – that we just need to be patient. But it is also possible that the current policy settings will leave us short. Given this, the possibility of lower interest rates remains on the table. Monetary policy does have an important role to play and we have the capacity to play that role if needed.

In saying that, I also want to recognise that monetary policy is not the only option. There are certain downsides from relying just on monetary policy and there are limitations on what, realistically, can be achieved. So, as a country, we should also be looking at other options to reduce unemployment.

One option is for fiscal support, including through spending on infrastructure. This spending not only adds to demand in the economy, but it also adds to the economy’s productive capacity. So it works on both the demand and supply side.

Another option is structural policies that support firms expanding, investing, innovating and employing people.

All three options are worth thinking about.

From my perspective, the best option is the third one – structural policies that support firms expanding, investing, innovating and employing people. A strong dynamic business sector is the best way of creating jobs. Structural policies not only help with job creation, but they can also help drive the productivity growth that is the main source of improvement in our living standards. So, as a country, it is important that we keep focused on this.

I will now change tack and move to the third question: should today’s reduction in the cash rate be fully passed through to mortgage rates?

My usual practice in answering this question has been to explain that there are a range of other factors that influence mortgage pricing, and then say ‘it all depends’. There are often reasonable explanations for why the standard variable mortgage rate does not move in lock-step with the cash rate.

Today, though, I would like to break with my usual practice and provide a clearer answer. And that is: Yes, this reduction in the cash rate should be fully passed through to variable mortgage rates.

This answer is based on recent reductions in bank funding costs. Not only have these costs declined as a result of the change in monetary policy, but they have also declined because of movements in market-based spreads. Last year, these spreads increased and most lenders responded by increasing their standard variable rates by around 15 basis points. Over recent months, these spreads have reversed all the increase that occurred last year and returned to their 2017 levels. The result is that there has been a substantial reduction – at both the short end and the long end – in the cost of banks raising funds in wholesale markets. Average rates on retail deposits have also come down. This means that the lower cash rate should be fully passed through into standard variable mortgage rates. Full pass-through would also mean that the economy receives the full benefit of today’s policy decision.

That brings me to the final question: what about the savers, have we forgotten about them?

I know this question is on the minds of a lot of Australians, especially older Australians. I am reminded of this daily as people write to me telling me how the already low deposit rates are affecting their income. I am expecting to receive more such letters and emails after today’s decision.

The Board had a thorough discussion of this issue at our meeting today. We recognise that many Australians have saved hard and rely on interest from term deposits to support their income and spending. Today’s decision will reduce their income from this source and we understand why they would be disappointed with the outcome of today’s meeting.

At the same time as paying close attention to this issue, the Board considered what was best for the overall economy. Our judgement is that lower interest rates will help the economy as a whole. At the moment, this benefit is likely to come mainly through two channels. The first is a lower value of the exchange rate than otherwise would have been the case. The second is a boost to the disposable income of the household sector. In aggregate, the household sector pays around two dollars in interest for every dollar it receives in interest income. So, in aggregate, lower interest rates reduce the net interest payments of the household sector and so boost overall disposable income.

In time, we would expect the lower exchange rate and the boost to disposable income to lead to more jobs, lower unemployment and a stronger economy. This should benefit us all, although I recognise that in the short run the effects are felt unevenly across the community.

It is partly because of this unevenness that I want to repeat a point I made in answering the second question. And that is: the best approach to delivering lower unemployment and a stronger economy is through structural policies that support firms expanding, investing, innovating and employing people. These policies can have distributional effects too, but the benefits are more broadly based. So, as I said, as we ease monetary policy, it is in the country’s interest that other policy options are considered too.

The Reserve Bank Cuts As Expected! [Podcast]

The RBA has reduced the cash rate by 0.25% today as expected. Further signs of a weakening economy, exposed to the international risks which are rising.

Digital Finance Analytics (DFA) Blog
Digital Finance Analytics (DFA) Blog
The Reserve Bank Cuts As Expected! [Podcast]
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RBA Cuts As Expected

The RBA has reduced the cash rate by 0.25% today as expected. Further signs of a weakening economy, exposed to the international risks which are rising.

Given the BBSW has moved towards the banks in recent times, there is no excuse not to pass the full cut to existing borrowers. The question is, will they?

The RBA will continue to look at the labour figures, which suggests a rise in unemployment (which we expect) will lead to more rate cuts.

The Aussie USD rate rose, which is not what the RBA intended.

This is what the RBA said:

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.25 per cent. The Board took this decision to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.

The outlook for the global economy remains reasonable, although the downside risks stemming from the trade disputes have increased. Growth in international trade remains weak and the increased uncertainty is affecting investment intentions in a number of countries. In China, the authorities have taken steps to support the economy, while addressing risks in the financial system. In most advanced economies, inflation remains subdued, unemployment rates are low and wages growth has picked up.

Global financial conditions remain accommodative. Long-term bond yields and risk premiums are low. In Australia, long-term bond yields are at historically low levels. Bank funding costs have also declined further, with money-market spreads having fully reversed the increases that took place last year. The Australian dollar has depreciated a little over the past few months and is at the low end of its narrow range of recent times.

The central scenario remains for the Australian economy to grow by around 2¾ per cent in 2019 and 2020. This outlook is supported by increased investment in infrastructure and a pick-up in activity in the resources sector, partly in response to an increase in the prices of Australia’s exports. The main domestic uncertainty continues to be the outlook for household consumption, which is being affected by a protracted period of low income growth and declining housing prices. Some pick-up in growth in household disposable income is expected and this should support consumption.

Employment growth has been strong over the past year, labour force participation has been increasing, the vacancy rate remains high and there are reports of skills shortages in some areas. Despite these developments, there has been little further inroads into the spare capacity in the labour market of late. The unemployment rate had been steady at around 5 per cent for some months, but ticked up to 5.2 per cent in April. The strong employment growth over the past year or so has led to a pick-up in wages growth in the private sector, although overall wages growth remains low. A further gradual lift in wages growth is expected and this would be a welcome development. Taken together, these labour market outcomes suggest that the Australian economy can sustain a lower rate of unemployment.

The recent inflation outcomes have been lower than expected and suggest subdued inflationary pressures across much of the economy. Inflation is still however anticipated to pick up, and will be boosted in the June quarter by increases in petrol prices. 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.

The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities. Conditions remain soft, although in some markets the rate of price decline has slowed and auction clearance rates have increased. Growth in housing credit has also stabilised recently. Credit conditions have been tightened and the demand for credit by investors has been subdued for some time. Mortgage rates remain low and there is strong competition for borrowers of high credit quality.

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. The Board will continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time.

June cash rate: three possible outcomes

From Australian Broker.

An “overwhelming majority” of economists are forecasting that the Reserve Bank of Australia will alter the cash rate tomorrow for the first time since August 2016. Below, two analysts explain the ripple effects likely to spread across the economy as a result.    

The good news

Martin North, principal of Digital Finance Analytics, expects there will not only be a cut tomorrow, but another to follow later in the year due to the underperforming economy and dramatic drop in household consumption.

He believes it is highly likely the banks would pass along the savings to their customers, attributing his confidence to three major factors: the Bank Bill Swap Rate (BBSW) “dropping dramatically” over the last several months, the “heavy pressure” the RBA has put on banks to ensure they would pass a rate cut on, and the banks’ need to bolster consumer goodwill.

“The PR effect if the banks didn’t respond when rates were cut would be dramatic. The banks are in reputation-rebuilding mode. I think they would want to show that they are responsive to signals from the Reserve Bank,” North explained.

According to the financial analyst, the RBA hopes that banks would lower interest rates even for existing borrowers – a departure from the trend evidenced in the last several months – improving discretionary household spending and stimulating the economy at large.

The bad news

Unfortunately, North has expressed significant doubt that cutting the rate will achieve this goal.   

“The overall economic impact of the RBA’s adjustment will likely only have a marginal effect,” he said.

“In fact, it may have an unintended consequence because cutting that rate basically signals weakness. Sentiment might turn negative, particularly from international investors.”

“The exchange rate will go down, which means we’re likely to import inflation from overseas – high oil prices and high import costs. That may have a limiting impact on the Reserve Bank’s ability to cut further. But I suspect they might be forced to,” he continued.

Potentially rising unemployment, flat income growth, and the rising cost of living seem likely to claim any savings created by a rate cut. 

The unexpected outcome 

While CoreLogic research analyst Cameron Kusher believes a cut is the most likely decision to be made at tomorrow’s meeting, he could understand if the RBA chose to hold this month.

The housing market may be exhibiting the earliest signs of recovery, but according to Kusher, “It’s not a cut about housing. It’s a cut related to economic growth and inflation.”

He added, “Waiting another month would allow the RBA to gather more evidence as to whether the housing market is truly improving, and it will afford them the luxury of seeing the March quarter GDP figures which are released the day after their board meeting on June 5.”

If the report was to show another weak quarter of economic growth, it would “surely trigger the need for a 25 basis point or even 50 basis point cut to the cash rate in July.”

Waiting would also allow for another month’s data regarding the labour force to be examined, with an increase in the unemployment rate more solidly proving it’s a trend.

Given the “slow and measured approach” that the RBA has shown in its cash rate considerations thus far, it would not be shocking for it to wait for the above data to be accessible before taking action.