The Reserve Bank has cut the official cash rate for the second month in a row to a fresh record low of 1 per cent as it desperately tries to pump some juice into Australia’s stalling economy.
The 25 basis point cut was widely expected by economists and telegraphed by RBA Governor Philip Lowe, who had warned June’s cut — the first move in almost three years — may not be enough to move the needle on weak economic growth and a weakening jobs market.
The unemployment rate increased to 5.2 per cent in April and Mr Lowe has flagged a target of 4.5 per cent. GDP growth remains stubbornly low at 0.4 per cent, wages growth is sluggish, inflation is well below target and retail sales are struggling.
“It would be unrealistic to expect that lowering interest rates by one quarter of a percentage point will materially shift the path we look to be on,” Mr Lowe told a lunch in Adelaide last month. “It is not unrealistic to expect a further reduction in the cash rate.”
In his statement today, Mr Lowe confirmed the decision would “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,” he said. “However, the uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy are tilted to the downside.”
Anthony Albanese has described the RBA’s decision as “quite extraordinary” and “a cry for help” in the midst of an “absolutely dire” economic environment.
The Labor leader said rates were now one-third of what they were at the height of the Global Financial Crisis and the government must intervene to right the ship.
“The first thing the RBA identified is the protracted period of low wages growth,” Mr Albanese said on Sky News. “The government has no policy for wages and indeed yesterday we saw penalty rates cut for up to 700,000 Australians.”
The cut, which comes a day after house price data showed the first monthly increases in Sydney and Melbourne since 2017, was “not about the housing market”, according to CoreLogic senior research analyst Cameron Kusher.
“It’s about the weakening jobs market, weak economic growth and other factors that have been deteriorating for some time,” said Mr Kusher, adding the effect on house prices “all depends on how much gets passed on by the lenders”.
BANKS FAIL TO PASS ON FULL CUT
Only two of the big four, CommBank and NAB, passed on the June cut in full to mortgage holders. On Monday, Treasurer Josh Frydenberg said “we do expect” the banks to pass any cuts on in full — but experts warn that’s unlikely as margins get squeezed the closer rates go to zero.
ANZ, which copped a spray from Mr Frydenberg last month, this afternoon announced it will pass on the full cut, reducing all variable interest home loan rates in Australia by 0.25 per cent from Friday July 12.
“We looked at a number of factors before reaching this decision, including business performance, market conditions and the impact on our customers,” ANZ retail executive Mark Hand said in a statement. “On balance, we believe this is the right decision for our home loan customers and for our business.”
The Commonwealth Bank responded to the RBA’s decision by cutting interest rates on its home loans, but not all customers will see the rate cut passed on in full.
Owner occupiers and investors paying principal and interest on their standard variable rate home loans will have their rates cut by 0.19 per cent, while those with interest-only loans will enjoy the full 0.25 per cent cut.
After CommBank’s announcement, the third of big four banks, NAB, following its lead announcing it would reduce its variable home loan interest rates by only 0.19 per cent.
NAB’s chief customer officer Mike Baird justified the bank’s decision not to pass on the full rate, saying it had assessed a range of factors including costs and competitive pressures in making the changes.
“The difference between what we charge and how much it costs us to fund a mortgage remains under pressure and while the circumstances of each RBA cash rate decision will vary and has some influence on the cost of borrowing money, it is not the only funding cost driver for NAB,” Mr Baird said.
Experts had predicted the banks would hold off passing on the full cut.
“It’s a real game-changer. There’s a sort of floor below which you say, how on earth does a lender make any money? I think we’re fast approaching that floor,” said Canstar finance expert Steve Mickenbecker.
“The problem the big four have now is their online savings rates are at 0.3 per cent, there’s not much distance to go anymore. If you cut another 0.25 per cent you’re at 0.05 on those rates. I don’t think Australian depositors are ready for 0.05 per cent interest rates.”
About 60 per cent of banks’ funding comes from deposits, which are split roughly 50-50 between online savings accounts and term deposits. With little room to move any lower on savings accounts, “they’re going to be really stretched to pass on much of a cut to borrowers”, Mr Mickenbecker said.
“Don’t be surprised if cuts at this level aren’t passed on in full,” Mr Kusher said. “Savings rates have been cut substantially over the last few years, significantly more than cuts to mortgage rates.”
While it’s “not a great look” for the banks to not pass on the full cut, Mr Kusher said it was important to remember “there’s a lot more to the cost of lending than just the cash rate”. “Before the GFC, typically cuts were passed on in full but we’ve seen many times since that isn’t necessarily the case,” he said.
Graham Cooke, insights manager at Finder, said customers “should always expect the full cut but in reality that’s not always what happens”.
“If you don’t get the full cut, especially if you didn’t last time, it’s probably worth contacting your bank to see if they can do anything for you,” he said. “Especially if you threaten to refinance, you’d be surprised how often you can get a rate cut simply by calling up.”
SAVERS BRACE FOR MORE PAIN
Hardest hit will be the roughly three million people in Australia who rely on interest from their savings to get by, about one million of whom are “very reliant”, according to Digital Finance Analytics founder Martin North.
“If you’ve got money sitting in a savings account, those rates have already got close to zero,” Mr North said. “Most people in my surveys with term deposits, the rates are so low that they’re not able to maintain their lifestyles without dipping into their capital. It’s a diabolical situation.”
Mr Cooke said Finder had polled economists on whether they saw online savings rates dropping to zero. “We got a few saying that might happen,” he said. “You could definitely see that falling so much that it’s not worth having a basic savings account at all anymore.”
Higher rates are available on some bonus savings accounts, provided no money is withdrawn or a certain amount is added each month, particularly with smaller lenders like ING, ME and UBank.
According to Canstar, the best online savings rate currently on the market is Bank of Queensland’s Fast Track Saver, which offers 2.75 per cent interest provided customers deposit at least $1000 per month.
“I know 2.75 per cent doesn’t sound inspiring, but it’s a whole lot better than 0.3 per cent,” Mr Mickenbecker said. “You can get 12-month term deposits at around 2.5 per cent with some smaller lenders.”
‘ROAD TO NOWHERE’
Some economists are predicting another one or even two more rate cuts this year to as low as 0.5 per cent.
Today’s move leaves the RBA dangerously low on ammunition should there be a more serious economic crisis, particularly amid uncertainty about US-China trade tensions.
“Let’s say we get down to 0.75 per cent by the end of this year, we’ve already stressed these lenders quite a bit and it will come to a point where shareholder dividends will start being squeezed as well,” Mr Mickenbecker said.
“It will mean we don’t have much room to move if we do hit even worse headwinds. If nothing improves between the US and China and they start a real tariff war, the world economy could possibly go into recession.”
RBA deputy governor Guy Debelle flagged last year that the next move could be quantitative easing, a controversial policy under which the central bank buys up assets like government bonds as a way of injecting money into the economy.
“I think it’s highly likely,” said Mr North, who describes QE as “kicking the can down the road but also putting a huge drag on the economy”.
“The whole monetary approach of Japan, Europe and the US is a road to nowhere. Look what happened 10 years ago. There was big QE done, rates went down, borrowing went through the roof and asset bubbles formed.”
A lot of companies used the opportunity to borrow cheap money and buy back their shares, artificially pushing share prices higher. “Most of (the QE) went into inflating house prices or buying back shares,” he said.
Mr North points to the difficulty the US Federal Reserve has had normalising interest rates. “The Fed last year tried to unwind, they lifted rates a few times, got to December and the stock market crashed (so they stopped),” he said.
“Artificially low rates may look attractive (but) if rates went to normal at the moment you’d kill households and business completely.”