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RBA rate cuts explained

03/11/2020

What a rate cut actually means and how it impacts more than just home loans.

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Before COVID-19 began, the Reserve Bank of Australia (RBA) had already reduced the official cash rate to the lowest historical level the country has ever seen.

It’s hard to believe that only four years ago in 2016, the same year that Donald Trump was elected President of the United States, our cash rate was sitting at 2% and the average home loan interest rate was more than 5%.

While home owners are currently enjoying the benefits of historically low interest rates on their mortgages, the interest rate has also fallen for savers and deposit holders – many of whom rely on their interest for retirement or daily living expenses.

What is the cash rate?

The cash rate is determined by the RBA and is part of a suite of tools used to manage the economy.

When economic conditions are weak, like they are at the moment, the RBA may reduce the cash rate to make money cheaper to borrow. This is referred to as ‘looser monetary policy’ and is designed to stimulate the economy by increasing the amount of cash in people’s pockets.

On the other hand, when economic conditions are good, the RBA may increase the official cash rate to slow inflation. Known as ‘restrictive monetary policy’, the cost of money increases and consumers are left with less spare cash to spend as the value of goods and services rise.

As well as changing the official rates, the RBA also changes the availability of funding to the banking system. When economic conditions are weak, the RBA is likely to make more money available to the banking system in order to promote economic growth. 

These decisions impact all rates in the market, including interest rates on deposits and loans offered to customers.

So with the RBA policy initiatives over the last 18 months leading to very low official rates and very high availability of money, it is no surprise that mortgage and deposit rates being offered by banks are at record low levels.

Many experts expect this trend of low rates to continue over the medium term, with the RBA likely to keep rates at very low levels until economic conditions materially improve.

The true cost of a low-interest environment

It’s a delicate and ongoing challenge to achieve the right balance for all of our home loan and deposit customers, but our main focus is on providing the best possible value over time.

Maintaining our financial strength is also a key consideration to ensure our long-term stability and investment back into services for our customers continues.

Our approach to balancing all these needs is very different to a shareholder bank, who also have to weigh up the impact on share prices and how much profit to distribute to shareholders.

At Newcastle Permanent, the customer is at the heart of our decisions. Any profits we make are reinvested back in to delivering great outcomes and services for our customers both now and into the future.

This article is intended to provide general information of an educational nature only. Information in this article is current as at the date of publication. Any links to third party websites are for your information only and we do not endorse their content.

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