RBA rings alarm on high debt levels
Risks to financial stability could be building as house prices and debt levels keep rising, the Reserve Bank has caution...
The Reserve Bank has released the outcome of its monthly board meeting for May amid speculation of a cut.
The RBA today held the official cash rate at a record low of 1.5 per cent.
Australia’s top economists and property experts were mostly expecting a hold, according to comparison site Finder, with 75 per cent of their panel predicting the move.
However, the decision for a cut is gaining momentum, with the majority of Finder’s panel expecting a cut by August, according to Graham Cooke, insights manager at Finder.
“At this stage, most of our experts are predicting at least one cut by August and many expect another drop after that – a cash rate of 1 per cent is in sight,” Cooke said.
“It’s clear that even a small change in the unemployment rate or a further drop in inflation could trigger a cut.”
My Housing Market’s Dr Andrew Wilson was one of the majority that believed the May decision would hold, with not enough economic factors to call a cut.
“Although latest inflation data remains subdued, low inflation in isolation should not be a catalyst to change the interest rate cycle after nearly three years on hold,” Dr Wilson said.
“Early signs of higher wages growth, a continuing strong labour market and indications that recent declines in house prices may now be bottoming out suggest the RBA will remain on the sidelines for another month.”
CoreLogic’s head of research, Tim Lawless, agreed with Dr Wilson’s sentiments, but said that a rate cut soon seems likely.
“While inflation remains below the RBA’s target range, labour markets generally remain relatively strong, supported by NSW and Vic, and the decline in housing values has lost some speed over recent months,” Mr Lawless said.
“If the cash rate does move lower later this year, a reduction in mortgage rates would provide some support for housing demand; however, we may not see quite as much stimulus for housing market conditions that we have seen after previous rate cuts.
“Generally, housing sentiment remains low and borrower mortgage serviceability is still assessed based on mortgage rates of at least 7 per cent. Households who already have a mortgage or prospective borrowers who are able to satisfy lender credit policies will be the winners if interest rates do fall later this year.”
Shane Oliver at AMP was among those who expected a rate cut due to the economic conditions.
“Rate cuts were already on the way thanks to slower economic growth and the downturn in the housing cycle, but weaker than expected underlying inflation in the March quarter argues that the RBA should move sooner rather than later,” Mr Oliver said.
Despite a rate cut coming soon, Mr Cooke said that mortgage holders do not need to wait around for the cash rate to fall to make the most of the situation.
“Whether the cash rate is at 1.5 per cent or 1.25 per cent, it’s still as low as we’ve seen in our history, and home loans rates are equally at historic lows,” he said.
According to Finder data, the average home loan size is at $384,700, with the average variable rate sitting at 4.91 per cent.
The potential for a cut of 25 basis points to 4.66 per cent could mean savings of nearly $700 per year.
However, the lowest variable rate of 3.44 per cent, according to Finder, would total $300 a month of nearly $4,000 per year.
“Don’t settle – the potential savings are huge. Whether you try to negotiate a better rate with your current lender or switch to save, It’s certainly worth the effort,” Mr Cooke said.
“But remember, don’t make a decision based on rate alone, always factor in the home loan’s features and whether these fit with your goals and lifestyle so you’re not stung down the track.”