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BREAKING: RBA Slashes Rates


The Reserve Bank of Australia today cut interest rates for the first time since May 2015, giving Treasurer Scott Morrison a boost as he prepares to deliver the Turnbull Government’s first budget tonight.

At this afternoon’s monthly meeting, the board cut the official cash rate from 2% to a new record low of 1.75%.

The cut comes after last week’s surprise inflation figures showed an annual rate of 1.55%, dropping below the board’s preferred 2-3% inflation target.

The decision comes just hours before the federal Budget, which the Turnbull Government is expected to use to outline its economic credentials in the lead-up to an early election in July.

While the official cash rate has dropped, the big question is, will banks pass on the savings to homeowners?

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How lower rates will affect the market

The RBA’s move to cut rates is good news for the housing market but in line with expectations, says REA Group chief economist Nerida Consibee.

“Following on from surprise inflation figures released last Wednesday, the RBA cut interest rates today by 0.25%. Headline inflation actually fell over the quarter. This is the first time that this has occurred since December quarter 2008. Prior to the release of the inflation figures, it was considered unlikely that rates would be cut.

“Strong job growth figures released earlier supported holding interest rates stable. The RBA aim for an annual inflation rate of between 2% and 3%. The annual rate is now at 1.55%. It is rare for the Reserve Bank not to cut rates when inflation falls below their target,” she says.

But the RBA’s decision to lower interest rates by 25 basis points isn’t necessarily good news for homeowners, Consibee says.

“A cut in rates is positive for the Australian housing market. Median house prices showed weakness in the December quarter but rebounded slightly in the March quarter. Sentiment towards housing does, however, appear to be down and so this will be a positive for the market.

“It is unlikely that the big four banks will pass on a full cut in rates given their continued concerns about their exposure to the Australian housing market,”she says.

House value growth

The RBA’s decision comes as the latest house price data shows that dwelling values continue to grow while rental yields grew at a record low rate of 3.4% for April, according to CoreLogic data.

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CoreLogic RP Data head of research Tim Lawless says housing value growth may have peaked.

“The results show value growth moved at a faster pace compared with the final three months of 2015 when capital city dwelling values slid 1.4% lower off the back of weaker market conditions in Sydney and Melbourne.”

“While we’ve seen capital gains moderate substantially after peaking last year in Sydney and Melbourne, dwelling values continue to trend higher, just not as fast. The annual rate of growth in Sydney peaked at 18.4% in July last year and has since moderated back to slightly less than half the peak rate of growth, at 8.9% over the most recent twelve-month period.

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