The RBA is cutting rates, but the AUD isn't having it

The recent RBA board meeting saw the cash rate in Australia cut by 0.25% to 1.5%. This cut comes as part of a rate cutting cycle that technically started in 2011. After a series of rapid cuts, there have been longer pauses between cuts over the last couple of years with two cuts in 2015 and two so far in 2016. The long pauses between cuts indicate that the RBA is being cautious and obviously doesn’t want inflation to get out of control. Weak CPI data recently, however, has given the RBA more scope to continue cutting rates with very low business investment cited as a reason for the recent cut.

One of the goals of cuts in the cash rate, even if not explicitly stated, is to weaken the value of the Aussie dollar. As the cash rate gets closer to 0%, however, further rate cuts are having a smaller effect than intended, with theAussie dollar currently trading higher against the US dollar than before the rate cut. In addition to its marginal impact on the currency, the general macro-economic effects of further rate cuts is likely to be quite small. The RBA board Governor, Glenn Stevens, has indicated that he thinks the effectiveness of lowering the cash rate will diminish as rates approach 1%. This is the general experience of several central banks around the world at the moment with worldwide interest rates at exceptionally low levels. Some believe the further monetary policy tools, such as a ‘quantitative easing’ program might be necessary in Australia once interest rate cuts stop providing the expected economic boost.

With national auction clearance rates at a high for the year, the housing market is stronger than ever. First home buyers and investors are active in this market with people clambering aboard to take advantage of the capital gains on offer. While the cut in overnight cash rate is supposed to feed into the rest of the interest rate market, that isn’t always the case and depends heavily on what the banks decide to do. The cost of funding for banks doesn’t necessarily directly correlate with the cash rate although most people expect that banks will cut their mortgage rates in line with the change in the cash rate.The four major banks, Commonwealth Bank, Westpac, ANZ, and NAB have all announced a drop of between 0.10% and 0.14% in their mortgage rates, compared to the 0.25% cut by the RBA, since last Tuesday’s rate decision. The strong market position of these four banks allows them a significant amount of pricing power in the market so that they can pass on smaller mortgage rate reductions than the change in the cash rate without losing any real market share. Interestingly, the banks have actually raised deposit rates, probably as a result of increasingly fierce competition for depositor’s funds, but also possibly as a political manoeuvre to sate the public.

Interestingly, while the cuts on the banks’ existing loan books were below that of the cash rate, competition for new loans remains as fierce as we’ve ever seen so there remains a big disconnect with what the press is discussing and what those dealing with the banks on new purchases or refinances are seeing. Rivkin Finance (www.rivkinfinance.com.au) has been able to find some great rates for clients and if you feel frustrated with your existing loan please don’t hesitate to contact us.

The next RBA board meeting will be on 6 September. With four more RBA meetings this year there is still the possibility of further rate cuts this year. 

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