RBA cuts the cash rate to a new historic low

RBA cuts the cash rate to a new historic low

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.75 per cent, effective 4 May 2016. This follows information showing inflationary pressures are lower than expected.

Tim Lawless, CoreLogic Director of Research comments on today’s result.

The RBA decision to cut the cash rate to a new historic low today of 1.75% was likely to be hotly debated at the board meeting held today.

On one hand we have economic growth tracking at 3% per annum, a housing market where the pace of capital gains is moderating in a controlled fashion and relatively strong labour market conditions.  Balance this with negative quarterly inflation and a high Australian dollar and it becomes clear that this decision probably could have gone either way.

The big question relevant to the housing market is how much of the lower cash rate will be passed on to mortgage rates.  The spread between the cash rate and standard discounted mortgage rate has been widening since 2008 when there was 1.8 percentage points difference between the two rates.  By the April 2016 the spread has doubled to be 3.65 percentage points and is likely to widen further if the full rate cut isn’t passed on by lenders to mortgage rates.

With home values still showing some upwards momentum, lower mortgage rates are likely to provide some further stimulus to the housing market, which the Reserve Bank will be monitoring closely.  The last thing they would like to see is a rebound in the rate of capital gain, particularly in Sydney and Melbourne where dwelling values have already risen 50% and 31% respectively since the rate cutting cycle began in November 2011.

Read the RBA Media Release for more information.

by Tim Lawless