The Reserve Bank of Australia (RBA) has brought down the official cash rates by 1% following a historic 25-basis point reduction last month.
The RBA’s latest back-to-back cut is its first since 2012. It defies market expectations and allows for two consecutive months monetary easing.
RBA Governor Philip Lowe stated last month that one cut would not bring down the unemployment rate to 4.5%. Recent data show that the unemployment rate has risen steadily to 5.2% in the past months.
Lowe believes the RBA’s recent decision to make a follow-up cut this month would help the bank achieve its goal.
He stated that the board would be making faster progress in reducing the unemployment rate and will be more sure to reach the inflation target. “The board will continue monitoring developments in the labor markets and adjust monetary policy as needed to support sustained growth in economy, and achieve the inflation goal over time.
Are lenders likely to follow their example.
“The problem the big four have now is their online savings rates are at 0.3% — there’s not much distance to go anymore. These rates can be reduced further by 0.25% to 0.055%. Steven Mickenbecker (finance expert) stated that Australian depositors do not want interest rates of 0.05%.
Mickenbecker indicated that around 60% of home loan funds are sourced using a mix term and savings deposits. With deposits rate being affected, Australians could be discouraged from saving — this might lead to a drop in domestic deposits, pushing banks to increase their dependence on offshore markets and other sources of funding.
“Very low mortgage rates could further depress net interests margins.” This increases the risk that future reductions in the cash rate may not be fully passed on and likely explains why the reductions in deposit rates have, up until now, been greater than those in mortgage interest rates,” Cameron Kusher (CoreLogic head of research), stated in a previous Your Mortgage Report.
According to data from the RBA, $1.58 Billion was spent on deposits to authorized deposit-taking banks. Comparatively, $1.83bn was the total outstanding mortgages.
Are RBA’s ammo resources being wasted?
Market watchers are also concerned by the wider issues surrounding the RBA decision. This is especially true given the possibility of it not being the final cut for the current year.
Mickenbecker indicated that this move may limit RBA’s ability respond to serious economic risk.
He stated that if we are faced with more headwinds it will mean we won’t have the ability to move as much. He stated that if there is no improvement in relations between China, America, and they start a trade war, then the global economy could go into recession.
Alan Oster, NAB chief economist, said in the Your Mortgage Report that quantitative easing (QE), which is a form of monetary easing (RBA) may be considered by the RBA to stimulate the economy if rates are not cut.
“We have previously noted that additional policy adjustments may be required and we highlight the risk the RBA could provide additional policy stimuli before 2020. He suggested that the RBA might consider further rate cuts or lowering cash rates to 1%.
Martin North, Digital Finance Analytics founder said that it is very likely the RBA would decide to continue with QE.
“The whole monetary approach of Japan, Europe and other countries is a road to nowhere. What was the situation 10 years ago? News.com.au listened to him tell them that QE was very widespread. Rates dropped, borrowing increased, and asset bubbles emerged.” “Most QE was used in order to buy back shares and inflate the prices of houses.
However, some still expect the RBA to continue the series of rate cuts — in fact, Capital Economics’ economist Marcel Theliant said the central bank might cut rates again later this year and in early 2020, bringing the cash rate to 0.5%.
He explained that Australia’s recent housing crisis and experiences in other countries have demonstrated that even though prices are rising, there is still a need for extra stimulus.