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True to form, on Melbourne Cup day, the Reserve Bank of Australia cut the official interest rate by 0.15% to a historic low of 0.1%.
Well, well, well – so they cut it again eh?
Although to be fair, with Australia plunging into a Coronacession, and the likelihood of elevated unemployment numbers, the RBA is committed to doing whatever it can to support jobs and the economy.
And one of their biggest weapons – is cutting the official cash rate.
This is supposed to boost business borrowing and consumer spending to try and stimulate the economy to create jobs.
OK fair enough, but what does a rate cut mean for the likes of us?
Savers
If you are a saver, or have the bulk of your net wealth sitting in the bank – then I’m sorry, but the latest rate cut will be detrimental to your savings.
RateCity analysis shows the average savings rate is now 0.52%, which could fall to below 0.40 per cent on the back of today’s rate cut.
To be honest, I wouldn’t rule out the prospect of savings rates dropping to 0% as a worse case scenario.
You’ve got to at least start to think about the best use of your capital, risk-adjusted.
Mortgage Borrowers
Mind you, the net effect for borrowers, is pretty damn good.
This is because we “should” see mortgage rates fall further from their record lows.
That’d all depend on the lenders of course, and I note that at time of writing NO big 4 bank has cut their variable rates (although have cut their fixed rate offers).
Again, piggybacking off RateCity, you can see the effect on mortgagees here:
Investors
Traditionally, I’ve always held the view that rate cuts are a sign that the economy is tanking, and that economic conditions are worsening… that’s what we were taught at school anyway.
Fast forward to today, and my belief (solely my own), is that the latest rate cut will be a bullish signal for investors (read why, here).
Especially, if the RBA has signaled that rates will most likely stay low for the next 3 years.
Let’s take a look at the two biggest asset classes of property and shares.
House prices are expected to rise because of cheap debt and also the multitude of government initiatives and concessions out there. Further, the removal of responsible lending laws come 2021 will be a game changer for borrowing capacity as we’ll then be able to squeeze a bit more juice from our borrowing power.
The stock market would probably receive a boost also, as monies flow out from savings accounts into the stock market to earn a better return. Also, big businesses will be able to either take on more cheap debt, or renegotiate their existing facilities to further boost the bottom line. This is because the cost of borrowing is lowered, which means more debt to take on more work to make more money.
Going Forward
I think the latest rate cut is more symbolic than anything else.
Interest rates are already at such low levels, a 0.15% reduction will barely have any impact for most of us.
However there are some immediate action points which you can do.
The easiest one is to talk to your lender about reducing your interest rate.
Make no mistake, their cost of borrowing has reduced, so why lower your interest margins also?
Next up, you should strongly consider investing – if you haven’t already done so.
Everyone’s circumstances are different, but if you are young, in a secure and well-paying job, and have discretionary income – then what’s stopping you?
Instead of leaving it in the bank, or throwing it on frivolous items – go make money on that money!
Because instead of signalling to people to spend more money as is the RBA’s intention – I strongly believe that this latest rate cut, will signal people to take on more risk and increase asset values as we pour into the property and stock markets to chase higher returns.
Sigh.
It’s not up to me to state whether this is good policy or not, or whether it will all go kaput in the end.
But I am reminded by this quote:
“Dear Optimist, Pessimist and Realist,
While you guys were arguing about the glass of water, I drank it.
Sincerely,
The Opportunist”.
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