Debbie Shankar - 5 May, 2015

Economists say this is the Last Rate Cut for 2015

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eChoice RBA Commentary for May 2015

The RBA have reduced the official cash rate to 2%.

This decision was based on:

o The value of the Australian dollar rising;

o Economic growth being lower than expected;

o Coal and iron ore prices falling, despite partial recoveries;

o New business investment being low; and

o Unemployment stabilising.

Economists are predicting that 2% is as low as the Reserve Bank of Australia (RBA) will go, at least for 2015. More rate cuts could come in 2016, but this hinges on the economy maintaining a 3 to 3.25% growth, which won’t become apparent until the fourth quarter of 2015.

The latest RBA rate cut was due to the Australian dollar gaining ground and hitting US80c in the closing week of April. Reserve Bank governor Glenn Stevens said the Australian dollar’s current rate was well above its fundamental value.

The RBA also felt that the upcoming budget would do little to boost the economy given that it is expected to push up the deficit. The current economic forecast also shows that growth is not as expected and that the economic outlook is not anticipated to improve in the way that the board had hoped.

The 0.25% cut in the cash rate reduces a $300,000 mortgage by $48 a month, and decreases standard bank variable rates to between 5.4% and 4.55% for a discounted rate.

Concerns over a rate cut pushing up home prices are warranted, but the RBA are said to be relying on the Australian Prudential Regulation Authority to ensure bank lending standards are not cut in order to increase their business.

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