Reserve Bank delivers anticipated rate decision
The Reserve Bank has delivered further relief to Australian borrowers with a long-awaited interest rate cut.
The widely tipped 25-basis-point reduction in the official cash rate on Tuesday comes after the central bank’s surprise decision in July to hit pause.
Today’s decision to reduce rates was reportedly unanimous, unlike the July pause, which was split six votes to three.
At the time, RBA governor Michele Bullock said the bank board wanted more data to confirm that inflation was well under control before cutting further.
Data at the end of July showed inflation was at 2.7 per cent, down from an annualised 2.9 per cent in the March quarter. The last time the trimmed mean was that low was in December 2021.
The figures further fuelled widespread predictions of a cut to official interest rates this week – and the bank board met that with its third cut in six months to bring the rate to 3.6 per cent.
The Australia Institute’s senior economist Matt Grudnoff said the cut will provide “long-overdue relief for mortgage holders” but should have happened five weeks ago.
“Borrowers should have been celebrating back-to-back cuts today,” Grudnoff said.
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“Interest rates are still restrictive. They’re still weighing the economy down and causing unnecessary pain for borrowers.”
Grudnoff pointed to the underlying rate, which moves slower than the headline rate and has fallen each quarter in the last year, and a stall in economic growth.
“How far do rates need to fall before they are no longer weighing the economy down? That figure is generally considered to be around 3 per cent,” Grundoff said.
“So, we still need another two or three 0.25 per cent cuts on top of today’s cut, before rates aren’t dragging the economy down.”
Impact on mortgage holders
The decision means the cumulative effect of 75 basis points in cuts since February could save the average borrower almost $300 a month.
But not all mortgage holders will be eligible for an automatic reduction.
Of the big four banks, only Westpac automatically lowers a customer’s payments if they have it set to the minimum.
CBA, NAB and ANZ customers must contact the bank if they want their direct debit amounts reduced.
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Canstar data insights director Sally Tindall urged mortgage holders to weigh up what was best for them, regardless of which bank they were with.
“For those managing to hold their budgets together, consider keeping your repayments exactly the same,” she said.
“Every rate cut is another opportunity to invest back into your mortgage and potentially be debt-free months, if not years early.”
A mortgage holder who had a $600,000 loan in February and had maintained their repayments since would be paying $272 more every month than if they had lowered them to the minimum outlay.
But it would also mean shaving off three years and three months off the length of their mortgage.
And while the official cash rate is now at 3.6 per cent, the rates offered to consumers are still substantially higher than that.
Tindall said that if the banks delivered the latest cut in full, the average variable rate for owner-occupiers would fall to 5.54 per cent but that shouldn’t stop customers from shopping around for a better deal.
“Your mortgage rate is one number where you want to be aiming for well below average,” she said.
“After this next cash rate cut, ambitious owner-occupiers should be able to set themselves a stretch target of 5.25 per cent.”
– With AAP
