Face of Nation : The Reserve Bank has cut the official cash rate for the second month in a row to a fresh record low of 1 per cent as it desperately tries to pump some juice into Australia’s stalling economy.
The 25 basis point cut was widely expected by economists and telegraphed by RBA Governor Philip Lowe, who had warned June’s cut — the first move in almost three years — may not be enough to move the needle on weak economic growth and a weakening jobs market.
The unemployment rate increased to 5.2 per cent in April and Mr Lowe has flagged a target of 4.5 per cent. GDP growth remains stubbornly low at 0.4 per cent, wages growth is sluggish, inflation is well below target and retail sales are struggling.
“It would be unrealistic to expect that lowering interest rates by one quarter of a percentage point will materially shift the path we look to be on,” Mr Lowe told a lunch in Adelaide last month. “It is not unrealistic to expect a further reduction in the cash rate.”
The cut, which comes a day after house price data showed the first monthly increases in Sydney and Melbourne since 2017, was “not about the housing market”, according to CoreLogic senior research analyst Cameron Kusher.
“It’s about the weakening jobs market, weak economic growth and other factors that have been deteriorating for some time,” said Mr Kusher, adding the effect on house prices “all depends on how much gets passed on by the lenders”.
Only two of the big four, CommBank and NAB, passed on the June cut in full to mortgage holders. On Monday, Treasurer Josh Frydenberg said “we do expect” the banks to pass any cuts on in full — but experts warn that’s unlikely as margins get squeezed the closer rates go to zero.
“It’s a real game-changer. There’s a sort of floor below which you say, how on earth does a lender make any money? I think we’re fast approaching that floor,” said Canstar finance expert Steve Mickenbecker.
“The problem the big four have now is their online savings rates are at 0.3 per cent, there’s not much distance to go anymore. If you cut another 0.25 per cent you’re at 0.05 on those rates. I don’t think Australian depositors are ready for 0.05 per cent interest rates.”
About 60 per cent of banks’ funding comes from deposits, which are split roughly 50-50 between online savings accounts and term deposits. With little room to move any lower on savings accounts, “they’re going to be really stretched to pass on much of a cut to borrowers”, Mr Mickenbecker said.
“Don’t be surprised if cuts at this level aren’t passed on in full,” Mr Kusher said. “Savings rates have been cut substantially over the last few years, significantly more than cuts to mortgage rates.”
While it’s “not a great look” for the banks to not pass on the full cut, Mr Kusher said it was important to remember “there’s a lot more to the cost of lending than just the cash rate”. “Before the GFC, typically cuts were passed on in full but we’ve seen many times since that isn’t necessarily the case,” he said.
Graham Cooke, insights manager at Finder, said customers “should always expect the full cut but in reality that’s not always what happens”.
“If you don’t get the full cut, especially if you didn’t last time, it’s probably worth contacting your bank to see if they can do anything for you,” he said. “Especially if you threaten to refinance, you’d be surprised how often you can get a rate cut simply by calling up.”
Hardest hit will be the roughly three million people in Australia who rely on interest from their savings to get by, about one million of whom are “very reliant”, according to Digital Finance Analytics founder Martin North.
“If you’ve got money sitting in a savings account, those rates have already got close to zero,” Mr North said. “Most people in my surveys with term deposits, the rates are so low that they’re not able to maintain their lifestyles without dipping into their capital. It’s a diabolical situation.”
Mr Cooke said Finder had polled economists on whether they saw online savings rates dropping to zero. “We got a few saying that might happen,” he said. “You could definitely see that falling so much that it’s not worth having a basic savings account at all anymore.”
Higher rates are available on some bonus savings accounts, provided no money is withdrawn or a certain amount is added each month, particularly with smaller lenders like ING, ME and UBank.
According to Canstar, the best online savings rate currently on the market is Bank of Queensland’s Fast Track Saver, which offers 2.75 per cent interest provided customers deposit at least $1000 per month.
“I know 2.75 per cent doesn’t sound inspiring, but it’s a whole lot better than 0.3 per cent,” Mr Mickenbecker said. “You can get 12-month term deposits at around 2.5 per cent with some smaller lenders.”
