Rate Drops

October 23, 2016

This last month saw a drop in the cash rate (base interest rate) offered by the RBA by .25% or 25 base points. The reasons for this change are quite logical and intended to help the economy along. The executive summary from the RBA's August meeting outlines the reasons for this change but let's get a better idea of what why it happened and what it could mean1.


The RBAs decision was based on a few factors. Their report states that they want to increase inflation to the level it should be at. Effectively, by making debt cheaper, people tend to spend more and take on more projects, which stimulates the economy to grow. It is not great if inflation is too high as this has it's own set of problems but for the past couple years Australia's inflation rate has been below the ideal level.



One thing that the RBA does not want to do is have the Australian dollar go up too much in value. If the Australian dollar goes up too much it will reduce the amount of over seas dollars coming to Australia. In their report the RBA specifically identify that there are some tough markets out there in the world and Australia would like to stay competitive and strong on the global stage to avoid letting some other markets pulling us down. This comment may be a tip of the cap to Brexit, making sure Australia is seen as desirable to foreign investors who may be scared away from the UK while the dust settles on that change. 


One concern with dropping the interest rate is that it could improve affordability for people (if mortgages cost less to hold, people feel they can afford more) and inflate the Sydney and Melbourne property markets even further than they already have. The RBA specifically identify that other regulatory boards (read APRA) have stepped in to regulate the housing market so this drop in interest rates isn't expected to inflate the housing market any further. 


What does this mean for your mortgage? The short answer is, speak with a good broker. Most lenders have passed on some of this rate drop to clients however very few have passed on the whole 25 base points. Some have also passed on more to owner-occupiers and less to investors. The justification for keeping some of the drop is that the banks are using this as an opportunity to save up capital and put some economic buffers in place for themselves. This may sound like a greedy move but that buffer can make a world of difference if people start defaulting on their loans in some of the more over priced capital cities.2 



1 http://www.rba.gov.au/monetary-policy/int-rate-decisions/

2 http://www.rba.gov.au/media-releases/2016/mr-16-18.html 


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