Low interest rates likely to persist

By Gerv Tacadena | 08 Jul 2020

Despite the likelihood of the cash rate being kept at 0.25% for the foreseeable future, Australian mortgage holders should remain cautious, experts said.

As expected, the Reserve Bank of Australia has decided to keep the cash rate untouched at its effective lower bound. Tim Lawless, head of research at CoreLogic, said it is unlikely the RBA will lower the rate further, as doing so would not be able to provide additional economic stimulus.

"The cash rate isn't likely to rise any time soon either, with the RBA providing clarity via previous announcements that they don't expect a lift in the cash rate until labour markets are approaching their definition of full employment and inflation is tracking towards the 2-3% target range," he said.

Lawless said the odds of hitting these targets are slim over the next 12 months, making any rate movements impossible.

However, there has been growing evidence of a turnaround in the economy, albeit from an unprecedented low base.

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For instance, recent market data show that the worst-affected labour markets are gradually repairing, retail sales are starting to surge, job vacancies are showing a modest lift, and the consumer sentiment readings are tracking around pre-COVID levels.

"In fact, the RBA has previously stated they see the Australian economy tracking somewhere between the best-case scenario and central-case scenario, highlighting the benefits of an earlier-than-expected flattening of the virus curve and wind-back of restrictive economic policies,” he said.

Lawless warned, however, that despite the stable rate setting, the economy is still under some pressure from downside risks.

"The key risk to economic recovery is a second wave of the virus. The recent, sharp rise in virus cases across Victoria is a reminder of the fragility the economy is facing and the importance of keeping the virus in check," he said.

Sarah Megginson, managing editor of Your Investment Property, Your Mortgage and Australian Broker, said there are concerns over the next few months that borrowers, in particular, should be wary of.

"Even as positive sentiment returns and trade begins to ramp up, there is still a big question mark around what will happen at the end of September when the JobKeeper initiative and other stimulus packages are set to come to an end," she said.

Megginson believes that it is high time for borrowers to review their finances and ensure that they are not over-paying.

"Anyone with a three in front of their mortgage has the potential to do better. Debt right now is the cheapest it's ever been, which means there's a real opportunity to make strong headway with your loans and get your finances in shape," she said.

Raj Ladher, home loan specialist at YourMortgageBroker, said borrowers who might be looking to refinance should consider reaching out to a broker.

"As part of their service offering brokers should be checking in with their clients at least every 12 months to see how their rate is fairing against the market, especially at the moment," he said.

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