Just when everyone thought the interest rates could not get any lower, the Reserve Bank of Australia has cut the rates from 0.5% in early March to 0.25%. On the 3rd of March, it was announced that the RBA hit a record low due to the overwhelming effect of the coronavirus outbreak. Later, it was proclaimed a pandemic, which prompted the RBA to slash the rates even further.
The Reserve Bank of Australia (RBA) has proclaimed that the new interest rates will be set to 0.25%. Along with the record-low level are the preventive measures to keep the country from recession. The downward trend has been ongoing for some time now. Prior to the announced reduction of rates early this year, the RBA already held interest rates at 0.75% before 2019 ended.
Initially, there was no scheduled RBA meeting until April. However, due to the growing crisis, there was an emergency gathering to create an effective response. Previously, the RBA signalled that there were no plans in cutting the rates lower. It may go below 0.25% threshold, but the organisation believes it would not be a useful decision.
For the first time since 1997, a rate cut this huge has been announced, especially outside the RBA’s traditional meeting. It does show how severe the situation has become.
An Emergency Action
According to Governor Philip Lowe of the RBA, other measures are in place. A notable example is quantitative easing, where different forms of securities are purchased from the open market. This initiative will help increase the supply of money in the country while also encouraging investment and lending transactions.
These government efforts are for ensuring that credit is still readily available to the citizens and businesses.
Admittedly, the coronavirus, known as COVID-19, is a health issue. However, it is now affecting the economy, not just in Australia but in many parts of the globe.
The financial system is in dire need of assistance, but it is not an easy feat. The virus has spread rapidly, and various countries are in restricted movement. People who want to cross the borders are no longer allowed to do so. Plus, social distancing has been widely implemented in several cities.
With the effect of coronavirus, there have been significant disruptions, causing panic across the world. A great consequence is not only observed in the health scene but in economic activities as well. The Governor also expressed his frustrations, mainly because there is still no way to contain the virus. Therefore, this crisis can keep going for several more months.
The volatility of the financial market has been on significant levels. Equity prices have declined at considerable rates, which even experts did not foresee. Bond yields have reached record-breaking lows, although major bond markets have not functioned properly. It has caused great interruptions in other markets.
Government bond markets have a critical role, and they are considered a financial benchmark. With impaired operations, many markets have suffered as well. For one, funding markets now only accept the highest-quality borrowers.
$90 Billion Funding for SMEs from the RBA
Aside from the lower cash rate, the RBA guaranteed that it would provide $90 billion (or more). The catch is if the banks would lend their cash to businesses, particularly small and medium ones. The Bank of England has the same initiative, which was passed before the declaration of the RBA.
The Morrison Government said that there would be an investment of up to $15 billion. This funding will be provided to smaller lenders. It will help them continue offering financial assistance to small businesses, as well as Australian consumers.
According to Josh Frydenberg, the Treasurer of Australia, the additional funds will allow customers who support smaller lenders to keep interacting with these firms. They can, therefore, access credit that they can afford. At the same time, it would help the $90 billion funding facility of the RBA.
How Are Banks Responding?
The immediate response is to manage the virus.
The health of the population is the primary concern. However, there are other supporting policies, such as fiscal and monetary, that have an active role in lowering economic disruption. As we can see in recent days, this virus has caused worldwide panic and disturbance in different industries and operations.
As the RBA Governor said that the virus would eventually be contained. During that time – or even before – the Australian economy will see its recovery. However, in the meantime, it is the Reserve Bank’s job to support other arms of policy, employment, and businesses. This way, the country will recover strongly as the health crisis ebbs away.
So How Are Banks Responding to the Rate Decrease?
When the cash rate was officially lowered by 0.25%, more than 50 lenders announced they would pass on the full reduction to their customers with variable interest rates. Among these banks included the four major banks in the country. Westpac has already reduced the rates accordingly just a few days after the decision of the RBA. Soon after, the rest of the biggest banks in Australia followed suit.
It was rare to see the enthusiasm of these institutions, especially after the 2019 cut. The current crisis has continued to develop. Expectations towards the banks are raised. Consumers want them to do what is right for households and corporations. Unfortunately, there is no confirmation of whether the other banks in the country will do the same.
If they do opt to cut the rates, people who have mortgages to pay may find themselves an incredibly great deal. Their financial position will surely improve if they continue paying their loan down at the same pace. They will also see the benefits if they decrease their repayment size.
There is one more question that people want to know, though. Will this cash rate keep going? According to the RBA Government, the board may not remove the cash rate decrease for some time. Some conditions have to be met, including:
- There is progress towards achieving full employment of the cash rate
- The organisation is confident that inflation will not cause any instability
The RBA did not stop at just cutting the cash rate all the way to 0.25%. The Bank has also set a target for the Australian Government bonds. Within three years, the yield should still provide support for providing credit to both small and medium-sized firms.
How Does the New Cash Rate Affect Consumers?
The decision to cut the rates was based on the necessary support of the economy. A response to the outbreak is needed, and the RBA chose to lower the cash rate. Governor Lowe stated that the coronavirus would continue to delay progress in the country, particularly in the employment sectors. Plus, the inflation target may not be fully reached – or at least, not easily. Even education and travel are not in good shape because of the pandemic.
By cutting rates, consumers can benefit from the lower interest. The RBA does hope that the citizens will support the economy. Spending some money will help improve the state of the country.
But What Does It Really Mean for the Consumers?
In reality, the RBA has been reducing interest rates since 2008, although the change is not as significant as the most recent one. However, many consumers know that this lower rate can contribute to a much higher price in housing. It typically happens to the most productive areas in the real estate sector, such as Melbourne and Sydney.
Some consequences may not be easily visible. For example, a lender may no longer be as confident towards the buyers as before. However, it is also possible that this trust will increase substantially.
As a result, homebuyers will be happier to borrow and spend their money in purchasing new homes. This activity will drive up the value of the real estate industry and the consumers as well. Another effect that has become quite common is that these borrowers use their increasing equity. As they take advantage of the situation, they become investors that own multiple properties.
While there are some distinct benefits, there are risks as well. One possibility is that the increased lending activity can lower the chances of those who may not be in the most robust financial state. They enter a much higher risk than before, with contracts that they cannot sustain.
The decreased cash rate does give increased confidence. Banks are often prepared to provide loans to customers. Although it sounds like a positive effect, it does come with risks. A crucial issue is that the banks may end up lending money to those who cannot afford to make repayments. It is risky to the loan arrangement, especially with the virus on the loose these days.
The loan can collapse any moment, perhaps due to unforeseen circumstances. Both the lender and investor or borrower will end up with little cash flow.
Did you save some money to purchase a property soon? The decreased cash rate may not be the best news for you. After all, it means that your interest rate return could also be lower than what you expect.
The effect will depend on where you currently are in your savings timetable.
Let us take a look at how the new cash rate can affect consumers:
- Consumers who have almost saved up the amount they need to purchase a property if you are nearing your goal, you are in luck. You will surely benefit from the lower loan rates. Banks and lenders are more confident in dealing with borrowers as well. Therefore, it may not be difficult for you to get a loan. You can already tell that now is the best time for you to seek a mortgage while the cash rate is still low.
- People with an existing mortgage. If you are among those who already have a mortgage, you can expect the interest rate cuts to be passed on to you. However, you will still need to talk to your lender to know how they plan to approach the decreasing rates. In some cases, the mortgage lender may allow you to reduce your current repayment amount. Another option is to continue with your repayments with the same amount. More customers prefer the second choice. After all, they can enjoy significant savings, particularly when it comes to their interest rates. It is why the real winners of the decreased cash rate are those with variable rates.
Will the Banks Truly Lower the Mortgage Rates?
It is nice to think that banks will help out customers in these trying times. However, history has shown that these financial organisations do not pass on the savings to their customers. Worse, they increase mortgage rates. It is their response to the new lending regulations. With the issue of soaring house prices, the cash rate may not even provide any benefit to existing mortgage holders.
In this situation, the best option is to avoid banks and choose third-party lenders. There is no need to wait for loan approval from banks or a confirmation that the cut will be passed on to customers. Instead, you may be able to take advantage of a better plan with less hassle.
What About the Property Market?
You could be someone who is preparing to sell your current home. Perhaps you want to buy or invest in a new one. You must understand what the latest cash rate means to you. While the majority of lenders guaranteed that they would provide the full 0.25% reduction to the consumers, the prices may still be unattractive.
Primary and second-tier lenders are willing to aid people, though. Rates may soon drop by the end of March 2020. However, it may take some time for them to make a formal announcement.
The good news is that there are private lenders who are offering several options for refinancing properties. As the rates go down, the demand for housing may soon increase. Even though coronavirus is still upsetting the property market and the whole economy, consumers may take part in saving the financial state of the country.
So who benefits more, the seller or buyer? Although it does seem that the buyer will gain more out of the new cash rate, it is the seller who will reap the real benefits. Therefore, if you are considering selling, you should focus on it now. On the other hand, being a buyer may put you in a much higher price bracket if you purchase now. Unless you opt to borrow from a private lender, chances are, you will not get the full benefits of the lower cash rate.
Ultimately, the benefit of these low rates is that consumers can have the extra money in their pockets. This way, they can use the cash to secure a better financial position these days.
Will Australia’s Economy Survive When the Pandemic is Over?
Many economists are not satisfied with the cash rate. For them, the Reserve Bank can do more than just decrease the interest rate. The RBA General acknowledged these criticisms. While there may not be any other solutions at the moment, Lowe is open to doing more for the economy.
The coronavirus has changed the way people do their day-to-day tasks. The RBA is just one of the organisations that Australians turn to during these difficult times. The credit supply, as confirmed by Lowe, is present. It will be helpful for both households and businesses in the country.
The Reserve Bank, along with other administrations and firms, still has many things to do. Additional measures should be considered, especially because there is still no cure for the pandemic. Thankfully, the Australian dollar worked as a shock absorber for the current state of the country’s economy.
As of the moment, the RBA has said that it will not interfere with the foreign exchange market. However, if the situation gets worse, the Bank is prepared for what is to come.
The ultimate goal of the RB and governments is to make sure that Australia survives after the pandemic is eradicated. Lowe has verified that the RBA will stay away from buying bonds from the Government. However, it will continue its operations in the secondary market.
The Reserve Bank is also not putting an end price. There may still be adjustments in the coming months. The bonds that may be purchased will vary depending on how the market reacts.
Because of the cash rate changes, experts know that there will be increased demand in the real estate market. What does it mean for the consumers? Since interest rates are lower, property prices will not deter the buyers from supporting the housing market. Perhaps it is what the country needs now.
The floor rates have changed since last year and continue to do so. Lenders have also altered how they compute a borrower’s ability to repay a loan. Along with the reduced rates, borrowers may see this situation as an opportunity to get a little more than their borrowing capacity.