Borrowers in hot seat as rate cut beckons

31 May 2019, Sydney, Australia - Following almost three years of a stagnant cash rate, the pendulum is due to swing with experts and economists from Finder's RBA Cash Rate Survey™ confident of a cut on Tuesday (04/06/19).

Finder's RBA Cash Rate Survey™, the largest of its kind in Australia, reveals a dramatic shift in sentiment with 32 out of 35 economists (91%) surveyed expecting the Reserve Bank to slash the cash rate at its next board meeting.

All experts who predict a cut forecast a 25 basis point decrease. This would bring the cash rate down to 1.25% – a new historical low.

When asked how low the cash rate will dip before it starts to rise again, the majority (18, 60%) indicated a 1.00% bottom, with the second largest group (10, 33%) predicting a bottom of 0.75% or lower.

Graham Cooke, insights manager at Finder, said the time has come for a cash rate cut.

"We can be fairly certain of the direction the cash rate will take in June – the writing is on the wall. However, the questions we need to ask are: how much will they cut by, and how many cuts will follow this one?" he said.

It's likely there will be at least one further cut over the next few months. Westpac has gone so far as to forecast three cuts by December – touting August and November as the months most likely. This view was supported by one in five respondents (22%) in Finder's survey. The majority (59%) predict two cuts this year.

For those with a $500,000 home loan, just one rate cut could pocket borrowers more than $900 per year. This snowballs to an annual saving of more than $2,600 should the three cuts come to fruition, with a reduced average variable rate of 4.16%.

Potential rate cut savings on different loan amounts:

Source: Finder *Annual savings calculated on a 30 year loan.

Meanwhile the current lowest variable rate on Finder is 3.29%. Switching to this from the average variable rate of 4.91% could save the borrower a staggering $5,636 per year (based on a $500,000 loan).

"For first-time buyers with a deposit, access to more affordable finance could be their ticket into the property market.

"A falling cash rate does generally lead to cheaper repayments for existing borrowers.

"That said, if the RBA cuts by 25 basis points this doesn't necessarily mean banks will pass on the rate cut in full" Cooke said.

In fact, a recent Finder analysis showed the average variable home loan rate has only followed the cash rate with 92% accuracy since 1990 compared to the average online savings account rate which mimicked cash rate changes with 99% accuracy.

"In other words, banks may be quicker to shave the interest off your savings than they are to take it off your home loan.

"If you don't get the full rate cut, vote with your feet.

"A lower cash rate will spur even further competition within the market so it is the perfect time to weigh up your options as you have the bargaining power – the best value home loan rates right now start with a '3'," Cooke said.

Here's what our experts had to say:

Alison Booth, ANU (Decrease): "The Governor of the RBA has more or less announced there will be a fall. It is clear that the RBA were considering it before the election but for political reasons did not, as it would not do to be interpreted as a signal favouring either major party. The economic fundamentals now warrant a small change. Whether or not the banks follow through with a cut in their rates remains to be seen."

Andrew Reeve-Parker, NW Advice Pty Limited (Decrease): "Spike in unemployment numbers will give the RBA confidence to move on interest rates. "

Ben Udy, Capital Economics (Decrease): "The labour market has now joined the deterioration in the rest of the economy. "

Christine Williams, Smarter Property Investing (Hold): "Our employment is steady"

Clement Tisdell, Economist (Decrease): "Statements by the Reserve Bank Governor"

David Robertson, Bendigo and Adelaide Bank (Decrease): "Latest jobs data slightly weaker, in contrast to RBA expectations in their SOMP, so (as indicated in Philip Lowe's recent speech) enough reason for some fresh monetary stimulus."

Debra Landgrebe, Gateway Bank Limited (Decrease): "This view is based off recent comments by the Governor of the Reserve Bank that indicated a shift towards quantitative easing."

Dr Andrew Wilson, My Housing Market (Decrease): "RBA has clearly signalled its intention to cut rates and with its nominated sensitivity measure of unemployment now on the rise is set to act. The release of the ABS GDP data for the March quarter the day following the rate announcement will encourage the Bank to cut to be seen to be acting to stimulate the economy ahead of what is likely to be yet another underwhelming result for the economy. "

Geoffrey Harold Kingston, Macquarie University (Decrease): "Reiterating my last response, the RBA should cut by 25 basis points this Tuesday. Breakeven inflation is just 1.2 % pa, and f/t employment growth was negative in the last ABS survey."

Jacqueline Dearle, Mortgage Choice (Decrease): "There is no question that cash rate cuts are on the cards this year and there's enough evidence to suggest that the first rate cut will occur in June. We have seen some deterioration in the labour market, with the ABS' most recent Labor Force data revealing the unemployment rate grew to 5.2% in April. The stubborn inflation rate is sitting at 1.3%. The combination of these key economic measures suggests a decrease to the cash rate would be appropriate this month."

John Caelli, ME Bank (Decrease): "It's likely the RBA will cut the cash rate in June due to an ongoing combination of factors, in particular, some weakening in employment growth, weaker GDP data and the below target inflation rate."

John Hewson, ANU (Decrease): "Economy slowing faster than they thought"

John Rolfe, Elders Home Loans (Decrease): "The RBA announcement this week has confirmed that unemployment sub 5% with low inflation can support at least 50 bps off rate cuts."

Jonathan Chancellor, Property Observer (Decrease): "The board has observed the Australian economy has slowed."

Leanne Pilkington, Laing+Simmons (Decrease): "The Governor flagged a cut and there's little point postponing what the RBA deems inevitable. With prices approaching the bottom of the cycle, interest rates potentially declining further, and an easing on lending restrictions, the signs point to the emergence of a buyer's market in the residential sector."

Malcolm Wood, Baillieu (Decrease): "Lowe's speech guided to a rate cut— slowdown, lower inflation, rising unemployment, falling NAIRU and forecast assumes two rate cuts."

Mark Brimble, Griffith Uni (Hold): "Bias is clearly to the easing, however the RBA may choose to wait for the new financial year for a range of reasons including the finalisation of the budget bills (which get through and which don't) and how geo-political issues play out on the global stage and markets."

Mark Crosby, Monash University (Decrease): "RBA likely to cut on back of latest inflation number. Only possible alternative is that they announce a change to the inflation target, but this is unlikely without some more public discussion."

Mathew Tiller, LJ Hooker (Decrease): "Given inflation and wages remain stubbornly low, combined with a softer outlook for employment market. We expect the RBA to cut the official cash rate to 1.25% at its June board meeting. This rate cut combined with the return of a Coalition government, APRA easing lending restrictions and the new first home buyer deposit scheme will see confidence return to property markets and in-turn increase transaction activity."

Matthew Peter, QIC (Decrease): "The RBA has finally acted in a decisive manner, signalling its intent to cut the official cash rate at its June meeting. It is now incumbent on the RBA to give clear guidance on the future path of monetary policy beyond its June meeting."

Michael Witts, ING (Decrease): "Such a move is consistent with the recent comments by the Governor. the economy has the capacity to grow at a stronger rate and lower interest rates will achieve such an outcome."

Michael Yardney, Metropole Property Strategists (Decrease): "The RBA has backed itself into a corner. The latest unemployment stats should now force its hand."

Nerida Conisbee, REA Group (Decrease): "I've gone against popular opinion and have held off calling a cut until now. I think this month will be it. While there has been a lot of poor economic data coming out, it looked like the RBA were holding on to the low unemployment rate as a sign that things were about to improve. With the unemployment rate ticking up in April, I think this will be enough impetus to make a decision to cut."

Nicholas Frappell, ABC Bullion (Decrease): "A slight increase in unemployment and 'underemployment' added to the weak Q1 CPI figure, which was then compounded by a 1.90 pct. fall in the Q1 'construction work done' number. Given that the election is behind us, and the RBA has evidence of both weak inflation and worsening jobs data, the RBA has scope to cut by at least 25 bp in June."

Nicholas Gruen, Lateral Economics (Decrease): "Their last set of minutes made up excuses not to cut during the election campaign. So they'll cut. They should cut by more but I doubt they will."

Noel Whittaker, QUT (Hold): "I am probably wrong but i think dropping would be a very bad policy - hope the bank realises that."

Peter Boehm, KVB Kunlun (Decrease): "My previous thinking was that interest rates would start coming down during the second half of the year. However, recent events strongly indicate a fall in rates will likely occur sooner than previously thought. Chief among these is the RBA Governor's public announcement that an interest rate cut is on the table at the next meeting. That's a pretty obvious indicator of where rates are headed and when. This announcement was predicated on a stuttering economy and the RBA's apparent view that the economy can support an unemployment rate below 5% and low interest rates simultaneously, without causing serious upwards pressure on inflation. Combine this with APRA's relaxation of the minimum 7% floor when assessing borrowers' capacity to pay, the returned Government's planned reduction in tax rates and calls for increased infrastructure spending, there is a clear expansionary focus which would be supported by reducing interest rates and consequently, the cost of borrowing."

Peter Haller, Heritage Bank (Decrease): "With inflation undershooting the target range, credit growth low and unemployment rising, now is the time for the RBA to provide some monetary stimulus."

Shane Oliver, AMP Capital (Decrease): "Growth has slowed, inflation has slowed well below target, unemployment looks like it is now starting to rise when it needs to be falling to get inflation back up and the RBA has recognised all of this (and moved to an easing bias)"

Stephen Koukoulas, Market Economics (Decrease): "Low inflation and weak economic growth."

Sveta Angelopoulos, RMIT University (Decrease): "Given the election results (and thus the policy implications), the proposed changes by APRA and the slight improvement in the housing market, this may be an ideal time for a reduced cash rate to have an effective impact on the economy."

Tim Nelson, Griffith University (Decrease): "Most recent comments have been around unemployment being targeted through expansionary monetary policy without impacting inflation."

Tim Reardon, Housing Industry Association (Decrease): "The accelerated downturn in new dwelling construction activity."

Other participants: Bill Evans, Westpac (Decrease)