The Reserve Bank of Australia has cut the nation’s official cash rate by 0.25% to 4.10% - the first interest rate cut since late 2020.
The decision by the independent central bank was widely expected and warmly welcomed by Anthony Albanese’s Federal Labor government, which described it as the “rate relief that Australians need and deserve”.
Australia's “Big 4” retail banks have pledged to pass on the cut in full to mortgage holders on variable interest rates, offering some relief to stretched homeowners.
However, Reserve Bank Governor Michele Bullock was at pains to warn that further interest rate cuts, pencilled in by financial markets over the next 18 months, are no certainty.
Nevertheless, the decision has the potential to kick-start Australia’s housing market, which has recently seen prices flatline and even fall in some of the major capital city markets.
The details
After holding the cash rate steady at a 13-year high of 4.35% since November 2023, the board of the Reserve Bank of Australia says “inflationary pressures are easing a little more quickly than expected”.
It’s decided to lower the cash rate to 4.10%.
The RBA began increasing rates from the emergency pandemic low of 0.10% in May 2022, in a bid to curb runaway inflation.
In the statement accompanying the rate decision, the central bank said that although it had agreed to lower rates by 0.25%, its assessment was that a cash rate at 4.10% was still “restrictive”.
And, in a press conference after the rate cut was announced, the RBA Governor, Michele Bullock, described the decision as “difficult”.
She also sought to cast doubt on the assessment by financial markets that there would be several more rate cuts over the next 18 months.
“The market is expecting quite a few more interest rate cuts to the middle of next year… about three more on top of this.
“Our feeling at the moment is that is far too confident that that’s as many rate cuts as we'll be having,” Ms Bullock said.
“I can't say one and done.
“What I can say is that we've done one, we've removed a bit of restrictiveness, we are still restrictive, and we are waiting for more evidence that we're getting inflation sustainably back in the band before we are willing to move again.”
AMP’s Deputy Chief Economist Diana Mousina described the bank’s move as a “hawkish cut.”
“What I mean by that is, basically, that the Reserve Bank didn't want to give the indication that it's going to cut rates aggressively from here, because it doesn't want to stoke a secondary round of upside inflation,” she told ABC News.
“It said that even with this cut, monetary policy is still restrictive, but at the same time, there is no need to really cut monetary policy or to cut interest rates aggressively right now.
“I don't think we should be expecting many rate cuts this year.
“We think that we'll get another two, but it's not like we're going to see back-to-back rate declines,” Ms Mousina said.
Federal Treasurer Jim Chalmers warmly welcomed the rate cut, describing it as “the soft landing that we have been planning for and preparing for.
“We know that this is not the solution to every challenge that people are confronting in their household budgets, but it will help,” he said.
Impact on housing
With the major banks agreeing to pass on the 0.25% cut in full to millions of variable rate customers, it’s estimated that a household with a $500,000 mortgage would save about $77 a month, a household with a $750,000 mortgage $115 and a household with a $1 million loan about $155 a month in repayments.
CoreLogic Head of Research Tim Lawless said this was significant, but “arguably the greater effect on housing markets will be the confidence injection received from the commencement of the rate-cutting cycle.
“Measures of consumer sentiment have already shown a solid rise through the second half of 2024 as households became more certain the rate-hiking cycle was over and the outlook for household finances started to improve.
“Historically, there has been a clear relationship between changes in consumer sentiment and home purchasing activity.”
PropTrack Senior Economist Eleanor Creagh agreed.
“Both buyer confidence and borrowing capacities will be boosted now interest rates have begun to fall.
“As a result, the price falls seen over the past two months are likely to be short-lived and may reverse with the slight improvement to affordability and buyer confidence driving renewed demand and price growth.”
Even before the rate decision was announced, that “buyer confidence” was already on show, with Westpac’s monthly consumer confidence survey noting that “house price expectations rose by 6.50% to 142.3 in February, a solid lift, and the first rise since October (2024)”.
Separate research by IMF Investors also shows consumers believe rate cuts will positively impact house prices.
MB Fund and MB Super Chief Economist Leith van Onselen also pointed to a big jump in auction clearance rates last weekend.
Combined with an increase in borrowing power for Australians with student debts, following recently announced changes to lending guidelines, he believed this would “intensify FOMO (fear of missing out) and put upward pressure on Australian home values.”