RBA announces November cash rate decision

The move marks the first time that the RBA has cut rates by less than 25 basis points.

In a statement, RBA governor Philip Lowe also announced:

• a reduction in the target for the yield on the three-year Australian government bond to around 0.1 per cent;
• a reduction in the interest rate on new drawings under the term funding facility to 0.1 per cent;
• a reduction in the interest rate on Exchange Settlement balances to zero; and
• the purchase of $100 billion of government bonds of maturities of around five to 10 years over the next six months.

“Under the program to purchase longer-dated bonds, the bank will buy bonds issued by the Australian government and by the states and territories, with an expected 80/20 split.

“These bonds will be bought in the secondary market through regular auctions, with the first auction to be held this Thursday for Australian government securities. 

“The bank remains prepared to purchase bonds in whatever quantity is required to achieve the three-year yield target. Any bonds purchased to support this target would be in addition to the $100-billion bond purchase program,” he said.

Industry reaction

Noting the rate decrease, the managing director of the Finance Brokers Association of Australia (FBAA), Peter White, said the RBA’s interest rate cut would support the property market, but “even more importantly it will help small businesses, and this will flow to other sectors”.

“It is crucial for banks to extend these lower interest rates to small-business loans. Small business needs this assistance during the current time,” he said.

“Banks are not to profit from this; it would be unconscionable in these times for banks to retain any part of a decrease.”

“Banks must immediately pass the reductions on to existing customers as well as new ones, and unquestionably pass onto small-business owners,” the FBAA head observed.

Aussie CEO James Symond commented: “Borrowers could be taking advantage of the expected rush to cut rates by some lenders, with many fixed and variable mortgage rates expected to fall over the next month. Borrowers should be exploring the market for competitive rates and speaking with a reputable mortgage broker. 

“A decision to see a mortgage broker could save borrowers thousands of dollars and years off their repayments over the life of the mortgage.

“Now is a great time to refinance and exploit the even stronger strong competition from today among lenders, but borrowers need to get sound, well researched advice from a credible broker or lender before taking this step,” he concluded.

Mortgage Choice CEO Susan Mitchell said: “The Reserve Bank has delivered the third cash rate cut this year and commenced a new era of monetary policy in Australia by announcing its quantitative easing program.

“Today’s decision will come as welcome news to families across the country in the lead-up to the Christmas period who are looking to save on their home loan interest repayments. However, it remains to be seen if lenders pass on any of today’s rate cut,” she said.

“Regardless of how much variable rates drop in response to the latest cash rate cut, the reality is that borrowing money has never been cheaper – the home loan market is extremely competitive right now and we’re seeing some fixed-rate loans that are cheaper than variable rates. Mortgage Choice home loan approval data shows that the trend towards fixed rates remains strong, with 32 per cent of borrowers choosing to lock in part or all of their rate in October.

“The decision to lower the cash rate makes sense given the extreme uncertainty in the global economy. Governor Guy Debelle recently said that Australia was technically out of a recession, despite the conditions in Victoria; however, recent data revealing persistently low inflation and high unemployment shows we have a long way to go.”

Loan Market executive chairman Sam White said brokers would welcome today’s official cash rate cut, but didn’t believe it would make up for bottlenecks in the application process.

“The Reserve Bank of Australia is doing what it can to support the economy’s recovery from the pandemic,” Mr White said.

“But, before today, borrowers with a mortgage of $400,000 were paying about $300 less a month on a 25-year loan than they were 18 months ago.

“We probably don’t need a rate cut at this point in time. Faster and more certain loan approval processes, especially among the big banks, would do more to drive applications than a cash rate cut.”

Meanwhile, Finsure managing director John Kolenda said how much mortgage-holders benefit from the latest cut in official rates depends on how much their lender passes on and how soon.

Mr Kolenda said consumers should not just be punting on RBA reductions to ride home a lower mortgage loan interest rate. 

“Unfortunately, the banks have form over the past couple of years for keeping a chunk of the RBA’s cuts to official rates,” he said. 

“It will be no surprise if they pull back on the reins and decline to hand over some of the latest rate reduction. 

“But mortgage-holders can shape their own destiny by simply seeking a more competitive rate from their lender. 

“We are still in a highly competitive lending market and banks are keen to retain [consumer] business.”

Mr Kolenda advised borrowers to not be “complacent” about their rate, but ensure they have a variable interest rate below 3.00 per cent.

Arun Maharaj, CEO of HashChing, said the cut was “no surprise”, with “Christmas edging closer and exceptionally low inflation levels despite the stimulus measures so far”.

“There’s also plenty of reason for the banks to pass on the cut to the millions of Australians with a mortgage, now that they have access to historically cheap capital through the RBA’s term funding facility,” he said.

“The only question is to who the banks will choose to pass the benefits of the cut. In the past, we’ve seen banks only pass on cuts to new mortgage customers rather than existing ones. Given squeezed bank margins this year, short of intervention from the government, we foresee this happening again. 

“It has been a gloomy year for mortgage brokers, but there’s actually a lot of reason to be optimistic at the end of 2020. The housing market has done much better than anticipated, and a cut for ‘new customers only’ means we’ll likely to see a lot of refinancing activity even if the predictions are off and housing softens in the new year.

“[T]he RBA’s monetary stimulus is going to be an incredibly important part of the housing market’s recovery in 2021 when fiscal stimulus comes to an end,” Mr Maharaj said.

Likewise, Yanir Yakutiel, CEO of Lumi, commented: “The problem is that lowering interest rates now doesn’t incentivise the banks to lend more. The issue in the Australian economy isn’t a waning demand for capital; it’s not even really in the supply side. What we have here is a distribution problem. Lower interest rates, if anything, make it harder for banks to lend profitably at a time we really need to have capital ready and willing to go where needed.

“It’s time for both the RBA and ‘Team Australia’ to step up and address the distribution issue. We need to see good initiatives like the term funding facility extended to non-bank lenders, who are far faster at getting capital into ‘real economy’ (i.e. small and medium-sized businesses) where it’s going to make an impact. In the meantime, let’s all hope that whatever the US election result will be, it’s a decisive one, so the global economy can enter 2021 with a bang.”

Cameron Kusher from the REA Group stated that the move was “inevitable at this stage”.

“What will be much more interesting than the cut is what else the RBA announces along with that decision such as buyer longer-dated bonds or any other measures they may choose to proceed with,” he said in advance of the announcement.

Resimac’s chief financial officer, Jason Azzopardi, said: “RBA indicated further easing of monetary policy will stimulate post-growth as lockdowns are eased.”

While the effective overnight cash rate is currently sitting around 0.13 per cent, and inflation is at around 0.7 per cent, the rate of return for banks is being drastically eroded – with several lenders suggesting that the cash rate is already effectively in negative territory.

Loan Market’s Mr White also predicted strong lenders would be “ultra-competitive” in winning borrowers post-COVID-19.   

“There’ll be a lot of jostling for the lowest product. But we already have historic levels of affordability and have had for some time.

“Lenders would do themselves a favour if they placed the same level of importance on streamlining their application processes (as they did interest rates).

“Brokers want their customers to have a stress-free experience in their finance journey; they don’t want to subject them to back-and-forth queries or stressful settlements,” he said. 

In this month’s Finder RBA Cash Rate Survey, 67 per cent of the 43 industry players and economists accurately predicted a cut.

Graham Cooke, insights manager at Finder, commented: “For the first time since 2011, the RBA has declared a Cup Day cut despite some skepticism from experts around the effectiveness of further monetary stimulus measures.   

“But significant considerations like the strength of the Australian dollar and a lagging Victorian economy have supported the case for further easing. 

“I suspect the horse races weren’t the only thing punters were betting on today,” Mr Cooke said. 

[Related: A fifth of brokers unfazed by responsible lending changes: survey]