This coming Tuesday, the Reserve Bank of Australia will almost certainly cut interest rates to a record low of 1.25%. Some lenders are already cutting their mortgage rates in anticipation of the upcoming cut. Several large banks — including NAB, ING and Bank of Queensland — have lowered their mortgage rates this week in an attempt to stay competitive ahead of the anticipated rate cut.
Greater Bank, an Australian customer-owned bank, has made the unprecedented move of cutting one of its fixed-rate home loans to less than 3%. On their website they say,
“Greater Bank will offer the lowest one-year fixed rate home loan in the market, after announcing today that it will reduce the interest rate on it's Ultimate Home Loan and Great Rate Home Loan to 2.99% p.a.”
Greater Bank CEO Scott Morgan said,
“As a customer-owned bank, we don’t have shareholders which allows us to redirect funds to directly benefit our customers. This is why we are in a position to offer the most affordable one-year fixed rate home loan in the market. This will ensure we remain very competitive against the industry’s major players in this fixed loan market. These are the lowest fixed term rates I have seen in my time in the banking sector and the perfect opportunity for new and existing customers to look at their current financial position and considering fixing their home loan.”
But be warned… Just because the RBA is set to reduce interest rates, does not mean that all lenders will pass on the full amount. Graham Cooke, insights manager at comparison website Finder said,
“If the RBA cuts by 25 basis points, this doesn't necessarily mean banks will pass on the rate cut in full. 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 starts with a '3'.”
But be careful about rushing in too early and fixing your mortgage rate. Westpac are predicting a total of three cuts this year! They suggest that June, August, and November will be the most likely months for a cut. After three cuts, that will put the interest rate at 0.75%! That’s insane!
Westpac's chief economist, Bill Evans, based this prediction on the rather gloomy outlook for the Australian Economy. He said,
“We see the unemployment rate drifting up to 5.4% by year's end, economic growth at 2.2% for 2019, underlying inflation at 1.4%, and the housing market still weak, although approaching stability.”
Investment bank, JP Morgan, went even further and predicted that Australian interest rates will fall to around 0.5% by mid-2020. That would require a total of four rate cuts by the RBA. JP Morgan have stated their reasons as,
“Lower-than-expected core inflation, a higher-than-desired unemployment rate, and a deterioration in the ‘global growth backdrop’.”
In other words, the economy is not looking good.
Although financial institutions suggest that this era of low interest rates is great for the consumer, the Australian public are just not buying it. Lending growth has fallen over the year to April to 3.9% — the weakest annual growth rate since records began in 1976.
In response, CommSec chief economist Craig James said,
“Ahead of the election, Aussies were reluctant to borrow. It remains to be seen whether the proposed rate cuts will change the behaviour of Aussie consumers and businesses. But lower interest rates, tax cuts, APRA changes on mortgage serviceability, the increase in minimum wages, and government assistance for first home buyers may lead to a lift in borrowing by home owners and investors.”
Aussies are also cutting back on other forms of credit. Outstanding debts for credit cards has fallen 3.9%. The national credit card balance now stands at $39.6 billion — the lowest it has been in eight years.
So what do you think? Will continually cutting interest rates spur on the economy? Or are Aussies getting smarter and realising that getting into massive debt only hurts themselves and makes them a slave to money? I certainly think that these rate cuts are the result of a financial system that doesn’t know what else to do. They think the only way to fix the economy is to encourage everyone to get into more debt. I say, “No, thank you!”.
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