It is widely anticipated that the next RBA rate cut will occur next week. Last month, the rate remained the same, and the most recent rate cut occurred last May, after the election. Leading banks (the big 4) have been forecasting a rate cut for this month, with a 25 basis point reduction prediction.
As you are probably aware, there have been two rate cuts since the beginning of this year. Having a third rate cut could mean Australia is heading towards a pattern of rate easing. This could benefit the country for several reasons – including encouraging higher spending and relief for borrowers.
In this article, we will cover why there is RBA rate cut anticipation, as well as ways you could prepare for the case that the RBA lowers the rate.
What’s all the buzz? Why is a rate cut so widely anticipated?
Inflation
Firstly, inflation has been falling, which is the primary reason that a rate cut is so widely anticipated for this month. The RBA has a target inflation rate of 2-3%, meaning that if we fall within this range or below, there is a good chance for a cut. The annual CPI is down to 2.1% and has been trending overall downwards this year, suggesting that inflation is overall lowering, as the cost of goods is rising slower.
Since the 1990s, Australia has had the 2-3% inflation rate target as an indicator for price stability. The years following the pandemic have largely endured inflation levels above this target, unlike most the time since it was introduced. Now, we are within the target range.
Inflation is an influential factor in the RBA’s decision to cut rates. This is due to the relationship between inflation and economic consequences. If a rate cut happens when inflation is high, inflation could be driven higher. That’s because lower rates encourage spending (due to lower borrowing costs), increasing access to goods such as houses and cars, upping demand and thus prices.
The fact the RBA has waited for confirmation that inflation is easing suggests that the economy is heading in a direction of growth. It’s likely the RBA is aiming to begin a cycle of rate-easing.
Unemployment
There has also been an increase in unemployment recently – another factor the RBA weighs up in their decision. Rate cutting can provide businesses with easier access to funds for growing their businesses and hiring more employees. When there is rising unemployment (known as a weakening labor market), there is more competition to get jobs. This means less pressure to raise wages, therefore less inflation risk. As a result of this reduced risk, a rate cut would be able to prioritise increasing employment rather than controlling inflation. In the opposite scenario, lots of vacancies means greater demand for labour which puts pressure on wages to rise, and therefore an increased inflation risk, which can cause rate hikes.
A global perspective
How can we compare Australia’s rate cut easing to the rest of the world, and how could this affect Australia? New Zealand has seen a more aggressive easing cycle begin, while the US has remained cautious. Here in Australia, we seem to be sitting in a middle ground, Many countries globally have at least began easing rates, suggesting a global shift in this direction.
Another point is that cutting rates can also weaken the Australian Dollar since there is less return for holding it. Products become more expensive as a result. So, it is important to proceed with caution before making the decision. Ideally, the benefits of rate cuts should outweigh the disadvantages, and this is one of the many factors involved in the decision.
How could you prepare?
Have a think about what options you may have if the anticipated cut happens. This way, you will be prepared to launch into action should the event occur. Whether this is refinancing, purchasing a new home, or anything else that can benefit from lower rates.
If you free up some cash, you might want to put it towards savings, which can give you greater flexibility if good opportunities arise during further rate cuts (also predicted by the big 4 for throughout this year and the start of next). At the moment, data shows that both consumer confidence is slightly low and households are conscious about spending, but this is improving. It helps to consider your choices and where the future is heading rather than making impulse purchases, so keep that in mind if you begin feeling less conscious about spending.
Additionally, we have previously written about new changes coming to the housing market, which you might want to consider reading into and planning around.
Alternatively, if you would like suggestions, feel free to book a free consultation or contact us here.
As always, thanks for tuning in and we hope you have learned something new.
Warm regards,
Next Step Mortgage Broking
