Most experts predicted the cut, but majority had anticipated it to happen in late 2015.
Economists are still forecasting another cut in rates in 2015, in an attempt to bolster the country’s employment numbers and carry one the economic reset of the post-resources boom age.
RBA Governor Glenn Stevens said the Board “taken time to assess the effects of the substantial easing in policy that had already been put in place and monitored developments in Australia and abroad.”
According to Stevens, the reduction is anticipated to further boost demand, “to foster sustainable growth and inflation outcomes consistent with the target,” quoting the moderate growth and the Australian dollar, which dropped significantly following RBA’s announcement.
Another factor that may have contributed into the decision is the political instability, as confidence weakens in some spots of the economy with Canberra seeing heightened leadership speculation.
The RBA has to find a balance between economic growth and growth that endangers overexcite the housing market.
Experts Overlooked the Initial Sign
RP Data’s Tim Lawless says, “lower mortgage rates have the potential to add some fuel to what are already strong housing market conditions.”
Housing prices in Australia’s capital cities have risen by 19.6% from the time interest rates started declining in November 2011.
“Lower consumer confidence, stricter serviceability requirements for borrowers, tighter lending conditions for investors, affordability challenges and low rental yields are all factors that may contribute to the moderation in housing market conditions over 2015.” The reduction could result in the standard variable mortgage rate to decline to 5.7% and discounted variable rates to 4.85% - the lowest-priced home loans starting from July 1968, according to Lawless.
Michelle Hutchinson, finder.com.au spokesperson, concurs that the recent cut was faster than expected. She says “28 of the 30 leading economists and experts from the finder.com.au Reserve Bank Survey got it wrong, as they were forecasting no change today. There is still a chance we’ll see the Reserve Bank lift the cash rate, with 16 of 30 experts expecting to see a rise within the next 18 months.”
Will the Cut be Passed on by Lenders?
According to Hutchinson, “we hope lenders will pass on the full rate cuts and more to their variable rate home loan customers because there’s no excuse not to pass on the full cuts.”
In line with the decision, the Bank of Queensland has already declared that it will cut rates.
Housing Market on Solid Footing
According to the RP Data Home Value Index, capital city home values are increasing by 1.3% during January 2015, indicating a solid overall start for the 2015 housing market, spurred by Melbourne, Sydney and Hobart performance.
Melbourne prices rose by 2.7% in January, Sydney figures were up by 1.4% and Hobart figures increased by 1.6%.
Important Figures over three months to January 2015:
- Best performing capital city: Hobart +4.4%
- Weakest performing capital city: Darwin -2.6%
- Highest rental yields: Darwin houses with gross rental yield of 6% and Darwin Units at 5.9%
- Lowest rental yields: Melbourne houses with gross rental yield of 3.2% and Melbourne units at 4.2%
- Most expensive city: Sydney with a median dwelling price of $723,000
- Most affordable city: Hobart with a median dwelling price of $341,000