Further RBA cut unlikely to benefit borrowers

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While the Reserve Bank of Australia may have gone 12 months between adjusting the official cash rate, there seems to be an increasing likelihood that the next movement will be sooner rather than later.

The RBA earlier this month dropped the cash rate from 2% to 1.75%, the first movement since May 2015 and that has been followed by predictions that it could soon fall again.

This month’s cut was largely the result of low inflation figures seen during early 2016 and Peter Jolly, global head of research for global markets at National Australia Bank, said if that continues the RBA may be forced to act again.

“Having cut rates to 1.75%... our current forecast is that they will sit at 1.75% for a good period, but I think it’s very obvious to say that there is another risk that they may need to cut rates again,” Jolly said.

“I don’t think there’s going to be anything in the next couple of months, but if we do get another low inflation print… then I think it’s definitely possible that they may cut rates again in August,” he said.

While Jolly said there may be another cut in August, the Commonwealth Bank is more definite in their predictions and believe low inflation will result in the cash rate reaching 1.25% by the end of 2016.

“The level of RBA concern is such that we feel obliged to add another cut to our cash rate profile (in November) following the one already pencilled for August,” Commonwealth Bank's chief economist Michael Blythe said in a client note last week as reported by the Australian Financial Review.

But while inflation figures may not be where the RBA would like them, not all are convinced the central bank will continue to bring rates down.

“I can’t imagine interest rates are going to bet at 1.25%, that’s another half a per cent lower than where it’s at now,” Rebecca Hona, mortgage broker with buyer’s agency wHeregroup, said.

“That’s another two rate cuts unless we see something like in 2008 and 2009 where the RBA cut the cash rate by 1% and I can’t imagine them doing that,” Hona said.

While she is sceptical of the cash rate dropping further, in the event that it did Hona said it would likely be little benefit to borrowers.

“I would say that they would pass some of it on, but I couldn’t see them passing all of it on,” she said.

“You’ve got too much money held in cash and if [banks] were to drop their interest rates, then they’d have to drop the deposit rate and if you’re not earning anything on your money then chances are you’re likely to withdraw it,”

“From a bank’s perspective they’ve got shareholders to answer to, deposit holders to think of as well borrowers. They have to find a happy medium and balance between all three.

“I can’t imagine the banks would pass on all of another cut; if they did there would probably be another rate increase later on like we saw in January so they could claw some of it back.”
 

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