The Reserve Bank of Australia (RBA) this month cut the official cash rate by 25 basis points, the second consecutive rate reduction this year, marking a 0.75% reduction in the cash rate since April.
The RBA’s decision to lower the official cash rate to 3.50% was largely attributed to the continuing European debt crisis and poor consumer sentiment.
“Financial market sentiment has deteriorated over the past month,” RBA Governor Glenn Stevens said.
“Europe’s economic and financial prospects have again been clouded by weakening growth, heightened political uncertainty and concerns about fiscal sustainability and the strength of some banks.
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Earlier this month, Australian shares hit a six-month low, wiping approximately $23billion from the share market.
Moreover, recent figures released by business research house RP Data found national house prices fell by 1.4% in May.
RP Data’s national research director, Tim Lawless, said that given the current state of the Australian share market and subdued property prices, the Reserve Bank decision was largely expected.
“Our latest index data showed capital city home values fell by 1.4% over the month of May, which is a factor the Reserve Bank would have been conscious of when deliberating their interest rate setting,” Mr Lawless said.
“Such a significant fall over a single month was unexpected considering the cash rate was slashed by 50 basis points in the same month.”
“Not only did home values fall further in May, but we also saw consumer sentiment remain fairly steady, suggesting the May rate cut has had little effect in stimulating consumer confidence and spending.”
HSBC chief economist for Australia and New Zealand, Paul Bloxham, supported the RBA’s decision to cut rates, but questioned whether further rate reductions will be necessary.
“We still think that the 150 basis points of RBA rate cuts priced in by the end of the year is too much,” Mr Bloxham said.
“Given our outlook for continued elevated locally-produced inflation and a pick-up in Chinese growth in Q2, we expect only one more 25 basis point cut in Q3. We then expect rates to be on hold at 3.2% until mid-2013.”
But not everybody was quick to support the decision
Residex chief executive John Edwards said he was disappointed with the Reserve Bank, and believes smaller rate cuts such as this month’s 25 basis point reduction could prove more detrimental to consumer confidence.
“This can simply work to the negative by further undermining confidence, given the very widespread press about difficult global finances,” Mr Edwards said.
While it appears economists are divided on how the Reserve Bank will move subsequently, there is sufficient evidence to suggest that a rate hike is not on the cards anytime soon – which is good news for borrowers.
If the rate cut is passed on in full by some of the country’s lenders, it may be time to consider refinancing your mortgage.
Second, with the property market performing relatively weakly across most sectors, now may very well be a good time to snag yourself a bargain.
If you would like to assess your current mortgage rate or discuss what opportunities are out there for you, give us a call today on 0437 498 800, or contact us online!
