The first interest rate cut in more than four years will serve as a boost for home buyers.
As most economists expected, the Reserve Bank of Australia’s (RBA) has made good on its highly-anticipated decision to lower the official cash rate by 25 basis points to 4.10 per cent.
The move, the first rate cut since November 2020, is seen as a means of improving borrowing capacity and providing mortgage relief.
Rates have been at 4.35 percent since November 2023. This followed a steep climb from the 0.10 percent of April 2022 as the economy emerged from the impact of the Covid pandemic.
While the February cut might be modest, it is significant for consumer confidence in property markets and an indicator of more to follow throughout the year.
The major banks are expected to pass through those savings in full to their variable home loan rates, having already cut their fixed rates.
For an average owner-occupier with a $600,000 loan, that would translate to a $92 reduction to their minimum monthly repayments.
Writing for AAP, Jacob Shteyman said Canstar data insights director Sally Tindall could see some lenders cutting new customer variable rates even further to capitalise on what could become a refinancing revival.
With affordability important, this cut will make it easier for prospective home buyers to service larger loans, boosting their borrowing power.
A single person earning a salary of $98,900 could see their borrowing capacity increase by more than $7900, while a couple could gain more than $18,500, depending on their monthly expenses.
Major banks including ANZ, CBA, NAB, and Westpac forecast cumulative cash rate cuts of 50-100 basis points this year given easing inflation.
Westpac has already dropped its lowest advertised variable rate to 6.44 percent in anticipation of a revival of the mortgage competition between banks.
The Commonwealth Bank was the only one to predict the first cut to be in February, and expects five cuts to bring the cash rate to 3.10 percent.
In the December quarter 2024, core CPI inflation continued its downward trend to 3.2 percent yearly, closely nearing the RBA’s two to three percent target band.
While inflation was 3.5 percent in the September quarter, the December figure was lower than expected.
One of the main drivers of inflation has been building costs, the result of rising supply costs, fuel prices and labour shortages during Covid.
The central bank lifted rates on 13 occasions between May 2022 and November 2023, before leaving it on hold for more than a year.
In a post-meeting statement, the board noted that inflation had reduced “substantially“ from its peak in 2022, but offered little clue as to when or if those cuts would come.
In the December quarter underlying inflation was 3.2 percent, which the board suggests inflationary pressures were easing a little more quickly than expected.
The figures, released last month, solidified expectations of a cut.
“There has also been continued subdued growth in private demand and wage pressures have eased.
“These factors give the board more confidence that inflation is moving sustainably towards the midpoint of the two to three percent target range.“
Despite the cut, the board emphasised that sustainably returning inflation to target remains its priority, and suggested further interest rate cuts are not guaranteed.
If monetary policy is eased too much too soon, disinflation could stall, and inflation would settle above the midpoint of the target range, the board members warned.
“In removing a little of the policy restrictiveness in its decision, the board acknowledges that progress has been made but is cautious about the outlook.
“The board’s assessment is that monetary policy has been restrictive and will remain so after this reduction in the cash rate…
“In removing a little of the policy restrictiveness in its decision today, the board acknowledges that progress has been made but is cautious about the outlook.“
It said it will continue to make its decisions based on incoming economic data, as well as global and financial market developments.
REIQ WELCOMES CUT
Real Estate Institute of Queensland (REIQ) CEO Antonia Mercorella said the rate cut may be modest but it was significant for consumer confidence in Queensland’s property market.
“With affordability top of mind for many Queenslanders, any measure that reduces borrowing costs is a welcomed development,” Ms Mercorella said.
“This cut will make it easier for prospective home buyers to service larger loans, boosting their borrowing power.
“Although a single rate cut won’t solve all economic challenges, it demonstrates the RBA’s commitment to foster broader sustainable economic growth.”
Ms Mercorella said that while rate cuts can offer short-term relief, the crux of affordability lies in increasing housing supply.
“If we don’t address Queensland’s housing supply constraints, the positive impact of lower interest rates will be negated by continued upward pressure on prices,” she said.
“Queensland’s real estate sector has proved remarkably resilient compared to southern states with sustained growth.
“Looking at the capital cities, Brisbane property values increased 0.3 percent in January, while values nationwide were unchanged, and Sydney and Melbourne property values fell 0.4 and 0.6 percent respectively, according to CoreLogic.
“A rate cut could bring back some investors into the market who may have been discouraged by prevailing interest rates and were waiting for a rate cut.
“Some indications of this hesitancy was seen in the ABS’s December quarter 2024 Lending Indicators data, which recorded a 9.2 percent drop in investor loans in Queensland.”
