RBA tipped to cut interest rate
Many economists expect the Reserve Bank will cut the official cash rate today to an all-time low of 0.10 per cent.
This will effectively take the cash rate to near negative interest rates on Melbourne Cup day.
This prediction comes after the RBA kept interest rates at 0.25 per cent in October.
Even though the RBA has kept the rate at the all-time low on Budget day last month, economists have been predicting a cut before the end of 2020.
The RBA, which meets on the first Tuesday of every month where the board makes a decision on interest rates, has reduced the rate five times since 2016.
The rate was dropped to a historic low in March this year due to the COVID-19 pandemic.
Market analyst Kyle Rodda told news.com.au that a rate drop today is "expected".
"In fact, it's probably a near certainty that the RBA will cut rates today from 0.25 per cent to 0.1 per cent. That includes the cash rate, as well as the rate on its term funding facility, and the yield target on 3-year government bonds," he explains.
"It's considered a matter of if and not when the RBA implements such a policy - it's possible it could be announced today."
Mr Rodda explains that the RBA is exploring this policy option now because of the value of the Aussie dollar against the US greenback.
"The RBA is struggling to keep the currency contained as other major central banks devalue their currencies via their own quantitative easing programs. So, you could say that the RBA is being forced to join in to the race to the bottom to devalue the Aussie dollar in order to boost our exports and support the economy," he explains.
"It will also lower mortgage rates and support household spending by lowering the cost of debt. It should also push the banks to lend more. It should also stoke an increase in investment," Mr Rodda adds.
Mr Rodda says this means borrowing will become "that little bit easier", while there'll be "a bit of extra money in the pocket from lower interest repayments".
"For a business, finance ought to become more available, while on a grander scale, it should make investing in certain projects more viable," Mr Rodda explains.
CreditorWatch chief economist Harley Dale agrees that reducing the cash rate is a "widely expected move".
A recent Finder study shows that 29 out of 43 economic experts, or almost 70 per cent, predict a cash rate cut today, with the majority expecting a rate reduction of 15 basis points to 0.10 per cent.
Graham Cooke, insights manager at Finder, said that this move would have been seen as "unprecedented" only a few months ago.
"The cash rate has already dropped 125 basis points in the last two years, so a further 10 to 15 point cut is unlikely to have much of an impact on the economy," he said.
"However, our experts seem to think that the RBA is in 'every little bit helps' mode.
"The Reserve Bank said earlier in the year that it was considering 0.25 per cent as an effective rock bottom, so a cut of any sort is a reflection of the grim economic situation," he said.
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Several economists are predicting a cut now that the Budget is out of the way.
"Interest rates were kept on hold last month largely due to the timing of the Federal Budget," Peter Boehm of CLSA Premium said.
"Now that this has been announced, and states are showing reasonable signs of economic recovery - other than Victoria - further easing of monetary policy will likely be supported by the RBA," Mr Boehm said.
Head of economic and market research at Bendigo and Adelaide Bank David Robertson said the RBA has been "very clear in recent messaging that they wish to provide further monetary policy support to the economy" and agreed this will most likely to be via a reduction in the official cash rate to 0.10 per cent.
But not all experts share this sentiment. Angela Jackson of Equity Economics, one of 14 experts predicting a hold this month, was of the opinion the RBA will take a "wait and see" approach to the economy before intervening further, especially in light of Melbourne coming out of lockdown.
"The RBA will maintain current settings until the economy shows signs of a sustained recovery," Ms Jackson said.
Mr Cooke said recent comments by RBA deputy governor Guy Debelle indicate that Australia may already be heading for economic growth after six months of recession.
"My hunch, despite economist's predictions, is that the tone of the recent comments from the deputy governor indicate that a November cut is actually unlikely," Mr Cooke said.
A lower cash rate means borrowing money is cheaper, which is good news for people with mortgages. The low rates this year are also spurring homebuyers to enter the property market.
An average mortgage holder could save $15,000 if banks pass on the cut.
Mr Cooke said that if the rate is cut, it could mean big savings from lenders who pass on the reduction to customers.
"For mortgage holders, another rate reduction will be welcome news - even a cut of 15 basis points could save the average home loan customer around $500 a year in interest," he said.
"Now is not the time for homeowners to be complacent. If the rate cut goes ahead and your lender doesn't pass on the savings, it's time to refinance to a more competitive deal."
If a homeowner with the average mortgage of around $480,000 were to drop from the current average variable rate of 3.99 per cent to 3.84 per cent, they would pocket an extra $495 per year. Over the course of a 30-year loan, this would save them almost $15,000 in interest.