RBA cuts cash rate at May 2016 meeting

RBA cuts cash rate at May 2016 meeting
RBA cuts cash rate at May 2016 meeting

The Australian dollar fell on news the May RBA meeting cut the cash rate.

CoreLogic RP Data's head of research Tim Lawless said the RBA decision to cut the cash rate to a new historic low today of 1.75 percent was likely to have been hotly debated at the board meeting. 

He said on one hand we have economic growth tracking at 3% per annum, a housing market where the pace of capital gains was moderating in a controlled fashion and relatively strong labour market conditions. 

"Balance this with negative quarterly inflation and a high Australian dollar and it becomes clear that this decision probably could have gone either way," he said.

"The big question relevant to the housing market is how much of the lower cash rate will be passed on to mortgage rates. The spread between the cash rate and standard discounted mortgage rate has been widening since 2008 when there was 1.8 percentage points difference between the two rates. 

"By the April 2016 the spread has doubled to be 3.65 percentage points and is likely to widen further if the full rate cut isn’t passed on by lenders to mortgage rates.  With home values still showing some upwards momentum, lower mortgage rates are likely to provide some further stimulus to the housing market, which the Reserve Bank will be monitoring closely.

"The last thing they would like to see is a rebound in the rate of capital gain, particularly in Sydney and Melbourne where dwelling values have already risen 50 percent and 31 percent respectively since the rate cutting cycle began in November 2011.

The shadow treasurer Chris Bowen has blamed the cash rate cut on the government's "incredibly poor economic management".

In a statement on Tuesday Mr Bowen said the decision reflected a weaker economic outlook, with the RBA expecting growth to moderate this year.

"In addition, incomes are falling, living standards are stagnating and home ownership is out of reach for so many Australians – facts the Government will be hiding from tonight.

"While our resilient economy is a testament to the efforts of hard working Australians, these are worrying trends we can't ignore." 

According to Finder.com.au's resident money expert Bessie Hassan borrowers are being warned to keep a close eye on rate cuts that are set to filter the market as a result of the Reserve Bank’s surprise decision to slash the cash rate to a new historical low of 1.75 percent.

She said the move follows days of speculation regarding a rate cut, fuelled by the release of inflation data last week, which revealed that Australia’s Consumer Price Index (CPI) has dramatically slowed.

"The outcome was in contrast to the forecast of 96% of the economists and experts in the Finder.com.au RBA survey, who predicted no change, citing a strong labour market, recovering Australian dollar and a ‘wait and see’ approach to the Federal Budget," she said.

"Only one economist, Savanth Sebastian of CommSec, correctly predicted the rate cut, with low inflation a likely key factor influencing the decision, he said.

"The Finder.com.au RBA Survey closed on 27 April 2016 – the same day the new inflation data was released. More than half (55 percent) of the 22 experts who weighed in to prospects of a rate movement correctly tipped a rate cut was in store in 2016. However today’s cut has come somewhat earlier than expected, with the majority of experts tipping August or November as the most likely month this would happen.

"Thirty-eight percent of experts surveyed on the rate cycle predicted a drop to 1.75 percent before a rise, while 13 percent are forecasting one further drop to 1.5 percent before the cash rate starts to rise.  Our new cash rate of 1.75 percent is remarkable – it is the lowest it’s ever been and a far cry from the pre-GFC days of circa 7 percent."

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Interest Rates

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