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Rate cut a mixed picture for investors

By Reporter 08 May 2013 | 1 minute read

While the Reserve Bank of Australia (RBA) cut the cash rate yesterday to a record low, investors must remember that standard variable rates are not yet down to GFC lows due to the banks' acting out of cycle with the RBA.

At a Multifocus Properties and Finance investor seminar last night, RP Data’s Tim Lawless said we are seeing “historical lows” in terms of headlining numbers, but “the rates offered by the banks still sit above [those] of 2009”.

This is due to the banks’ acting out of cycle with the RBA, he explained.

National Australia Bank was the first to move, cutting its standard variable rate by 25 basis points to 6.13 per cent, effective next Monday.

This is higher than the 5.75 per cent low seen during the global financial crisis (GFC), when the cash rate was dropped, at its lowest point, to 3.00 per cent.


However, in a doorstop interview yesterday, treasurer Wayne Swan argued this is not indicative of economic uncertainty within Australia.

“To compare the level of interest rates at the height of the global financial crisis to the level of interest rates now is just utterly irresponsible,” Mr Swan said.

“We have low unemployment. We have a strong investment pipeline. We have strong public finances. We have contained inflation and we have low interest rates.”

Mr Swan pointed to the strength of the Australia dollar as one factor reflecting the economic strength of the country, but also as one that challenges the domestic economy.

AMP Capital’s Shane Oliver, who was predicting another 25 basis point cut this year, now expects that the cash rate is likely “headed even lower, probably to 2.5 per cent”.

Mr Oliver noted yesterday that previous cuts have got some traction, with increased sales in the home buyer market, higher auction clearance rates and house prices. Overall, however, the response has been “tentative and weak” in the past 18 months and since the first cut since November 2011.

He said that, on balance, even if rates were to drop to 2.5 per cent, to “get standard variable mortgage rates back to the lows of 2009 may require another cut again”.

Further cuts may have unfavourable implications for negatively-geared investors’ current portfolios, warned DEPPRO tax depreciation specialists’ manging director, Paul Bennion.

"While falling interest rates means that the cost of holding a property is reduced due to lower mortgage repayments, it can also mean that the negative gearing benefits associated with owning an investment property are reduced," Mr Bennion wrote in his SPI blog.

Rate cut a mixed picture for investors
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