- The Reserve Bank has cut its official interest rate by 0.25 percentage points to a new record low of 1.25 per cent
- First change in the RBA’s policy setting since August 2016 aiming to support jobs growth in the face of rising unemployment
- RBA warns low wage growth and falling house prices are the main uncertainties dragging down the domestic economy
The RBA has been under mounting pressure to stimulate a clearly faltering domestic economy, with retail sales figures out this morning showing consumers had cut back their spending.
The bank felt it had to move given inflation has been marooned under its 2-to-3 per cent target band for the best part of three years and unemployment is starting rise.
So how does the rate cut impact you?
It’s not just homeowners who will be impacted. Although you might not notice it, and the impacts may be negligible, it will affect you – even if you don’t have a home loan.
Here’s how your financial situation may look different:
If you’re a saver…
You’ll see less monthly interest coming through your bank account every month.
The interest rate is determined by your bank, which is influenced by the Reserve Bank’s decision. If the RBA moves, the banks often follow suit.
However, interest rates are already so low that you won’t notice a huge difference.
“The best online cash accounts offer around 3 per cent interest and most term deposits sit between 2 and 2.5 per cent, hardly above inflation, and this is likely to fall with an RBA rate cut,” he added.
But if you’ve got a lot of money in savings, and will notice a small change in interest rates, the advice is to shop around.
If you’re a self-funded retiree…
If your main source of income comes from the interest you get on your savings, you’ll be stung by the RBA’s move.
“[The rate cut is] really going to have more of an impact if you’ve got $100,000 invested in the bank, and you’re relying on that interest income to live on,” AMP Capital chief economist Shane Oliver told Yahoo Finance.
“So if u have $100,000 in the bank, you’re getting 2.5 per cent from your bank at the moment, that’s $2,500 from the bank,” he said.
“You’ll still be struggling to live on that. And you might lose $250 [following the rate cut].”
If you’re a small business owner…
On the whole, a lower cash rate is good news if you run a business.
On the one hand, since business owners have savings accounts just like everyone else, small businesses often have more debt than money in their bank deposits, Oliver pointed out.
“It is probably good news … since most business owners have some amount of debt, it means the interest you pay on that debt will go down,” Oliver said.
Not only that, but since the lowered interest rate is designed to encourage more consumer spending, businesses will be the direct beneficiary of Aussies feeling more willing to open up their wallets.
If you own shares…
Historically, share markets tend to react positively to RBA rate cuts, so if you’re invested in stocks, a rate cut should be good news for you, said Gerrard.
“In addition to lower corporate borrowing rates and improved consumer confidence, more people move from cash into shares, chasing higher income returns which pushes the market higher.”
If you’re about to go overseas for a holiday…
When the Reserve Bank cuts rates, the aim is to inject extra cash into the economy by giving mortgage holders extra cash in their pockets. But it’s also to force the Australian dollar lower and thus boost our export income.
So a rate cut generally pushes the Aussie dollar lower, meaning you’ll get less bang for your buck when you convert your money.
“For people going overseas, this means lower conversion rates. If the cash rate drops, people from overseas are less inclined to hold AUD as they get less interest, pushing the AUD lower,” warned Gerrard.
“The good news is that the rate cut is largely expected so the impact on exchange rates should be relatively minor.”
And if you’re a home buyer/owner…
According to CoreLogic’s head of research, Tim Lawless, lower mortgage rates, along with APRA’s proposed changes to mortgage serviceability guidelines, and political stability from the outcome of the federal election, could trigger a rebound in the housing market.
“The latest rate cuts together with lower serviceability assessments for borrowers and greater confidence following the federal election should help to support an earlier than expected trough in housing values,” he said.
However, Mr Lawless expects continued income and expense scrutiny on prospective borrowers and economic conditions to offset the stimulus.
“[We] aren’t expecting a rapid reversal in house price declines due to ongoing tight credit policies and, more broadly, economic uncertainty as global trade tensions escalate,” he added.
Source: ABC NEWS, RBA cuts interest rates to a fresh record low; Yahoo! Finance, Here’s how the RBA rate cut will affect you, even if you don’t have a home loan; Mortgage Business, RBA makes cash rate move.