Will the RBA cut the cash rate this month?

We don’t like to dust off the old crystal ball and speculate very often, but there’s been so much noise about whether the RBA will cut the official cash rate this Tuesday that we feel compelled to address it.

30 meetings in a row.

That’s how long the RBA has kept the record low official cash rate at 1.5%. All the way back to August 2016.

So with an uninterrupted streak like that, why are we putting this article out now?

Well, it’s fair to say that speculation has hit overdrive that the RBA will make a cut when it meets on Tuesday. But it’s certainly far from a given.

So today, let’s look at some of the main reasons for a cut to the official cash rate, some of the main reasons against, as well as what a rate cut might mean for your home loan.

For: Inflation (or lack thereof)

Australian Bureau of Statistics data showed inflation was totally static in the March quarter, with the consumer price index at 0.0 per cent, bringing the annualised rate down to 1.3 per cent.

The unexpected reading has financial markets and pundits predicting an increased likelihood that the RBA will cut the cash rate this Tuesday.

Basically, the thinking is that by cutting the cash rate, the RBA could give the economy a good ol’ hit with the defibrillators.

ANZ Bank chief executive Shayne Elliott backed the case for cutting official interest rates to a new record low, saying it would boost economic activity and give “breathing space” to people struggling to make their home loan repayments.

“Maybe it will just give a bit of juice into the economy, and get a bit more employment, and put a bit of money back into people’s pockets,” Elliott says.

That said, some people doubt that an official rate cut would be passed on to mortgage holders, as we’ll touch upon later.

For: Falling house prices

Nationally, we’re amidst the worst annual housing price fall since the GFC.

Over the year, median prices nationally fell by 7.2% in average weighted terms.

The declines in the combined capital cities over this period was even larger at 8.4%.

CoreLogic’s research director Tim Lawless says a rate cut could help give the property market a bit of a boost.

“The prospect for lower interest rates is another factor that could support an improvement in housing market activity later this year,” says Lawless, who also adds that “the worst of the housing market conditions are now behind us.”

Against: The federal election

Perhaps the biggest reason why we may not see the RBA announce a rate cut this month is because we’re in the middle of a federal election campaign.

“Changing monetary policy during an election risks the central bank being caught up in a political fight,” says the AFR’s senior economics writers in an analysis piece.

“The RBA last raised interest rates during an election in 2007 and John Howard and Peter Costello never forgave then-governor Glenn Stevens. Howard had campaigned on keeping rates low.”

As we all know, Howard lost that election to Kevin Rudd, and the only other time there was an official cash rate change during a federal election was in 2013 – when Rudd lost to Tony Abbott.

So the track record for rate changes during election campaigns is not good for incumbents.

Against: Would lenders pass on the cuts?

So what would a cut mean for your home loan?

According to an analysis commissioned by the AFR, lenders would keep rates the same, or pass on only half the rate cut. That’s what they did after the last cash rate cut in July 2016, and it’s another reason the RBA might not end up making the cut this month.

If they did, however, and half the cut was passed on, the typical monthly repayment on a $1 million standard variable loan would reduce by just $65, the analysis finds. On the average $400,000 loan, the reduction would be just $26 a month.

Final word

So those are the main reasons for and against a cut to the official cash rate.

What’s a little more clear cut, however, is that most economists are predicting that if it doesn’t happen this month, it will most likely happen in the months to follow – and perhaps twice before the year’s end.

If you’d like to know more about what these potential upcoming cash rate cuts could mean for you and your family, please get in touch – we’d love to run you through it.

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