Before Septmber 19, a third rate cut wasn’t expected until early 2020. What changed so quickly?
Predictions of a potential October interest rate cut jumped from 43% to 80% on September 19 after higher than expected unemployment numbers were released – 5.3% as opposed to remaining at the expected 5.2%. Although 34,700 new jobs were created last month, Australia is seeing a high level of underemployment – we’re seeing more jobs, but less hours of employment available.
Over the last month, 50,200 part-time jobs were created but 15,500 full-time jobs were shed, meaning the figure of 34,700 new jobs created loses some of its impact when reflective of the actual hours of employment it creates. Unemployment numbers, a resulting fall in the Australian dollar and no change to inflation meant the RBA had little choice but to cut once again.
Are the banks lending more since the June/July cuts?
The standard variable home loan rate continues to fall, currently sitting at 4.94% – that’s the lowest rate since the Reserve Bank’s creation in 1960 (check out our comparison of lender’s current rates here). Customers are beginning to see the flow on effects to lending from the RBA’s first two rate cuts this year. The ABS released data on lending to households and businesses in July 2019 on 9 September, we’ve rounded up some of the key points below in seasonally adjusted* terms:
- Overall, new lending to households rose 3.9% after a 1.9% rise in June
- Household lending was driven by owner occupied dwellings (excluding refinancing, up 5.3%), refinancing of household loans (up 5.4%) and investment dwellings (excluding refinancing, up 4.7%)
- Specifically, refinancing for owner occupier dwellings rose 6.3%
- New loans for owner occupier first home buyers rose 1.3% in July
- In trend terms*, lending to businesses fell 1.3% in July 2019, but is up 1.5% from the year previous
It is also worth noting that the loosening of APRA home loan assessment requirements came into effect on the 5 July 2019, which is likely to have also had an effect on the increase in lending.
*seasonally adjusted: a means of removing the estimated effects of normal seasonal variation and ‘trading day effects’ (i.e. the varied activity on different days of the week and numbers of days of the week in the month)
*trend terms: smoothing of the seasonally adjusted series to reduce irregular components to create an estimate
What effect will this third interest rate cut have?
There is concern that the further interest rates are cut, the less effect they will have on economic growth. RBA governor Philip Lowe has highlighted that consumers seem to be changing the way they react to interest rates, using them to pay down their existing debts rather than spend their additional cash and as a result stimulate the economy.
Reducing interest rates, however, mean that it is prime time for home loan holders to take advantage of historically low interest rates to pay down their debt, unlock equity, refinance to a lower rate or upsize for a growing family. Changes to APRA’s serviceability assessment ceiling from a minimum 7% down to 2.5% over the loan’s interest rate also make obtaining first home, refinance or investor loans easier.
With a mixture of partial and full cuts passed on by banks after the June/July interest rate cuts, the RBA and home owners alike will be waiting to see to what extent the October cut will be passed on by the banks.