What do record low interest rates mean for Australian households and businesses?
As we approach the next rate meeting of the Reserve Bank of Australia ("RBA") in August, there is much speculation as to whether the RBA will continue to cut interest rates and what this will mean for Australian households and businesses. Following two consecutive rate cuts in June and July, Australia’s interest rate is now at a record low 1% as the RBA attempts to lift inflation, drive down unemployment and improve wage growth through a lower cash rate. While many economists think it is unlikely that we will see a third rate cut in August, they are still predicting that we will see an additional rate cut by December this year.
Reserve Bank Governor, Dr Philip Lowe recently addressed the low rates and RBA’s inflation targeting at the Australian Business Economics Anika Foundation. He explained that Australian’s should “expect an extended period of low interest rates” as it is “highly unlikely” that the RBA Board will consider raising interest rates until they are “confident that inflation will return to around the midpoint of the target range”. For reference, the actual inflation rate for the first quarter of 2019 is 1.3% with unemployment remaining stable at 5.2% both being far off the RBA’s existing inflation target of around 2-3% and unemployment level of under 4.5%.
He continued, stating that “the two recent reductions in the cash rate will support demand in the Australian economy” and that “the Board is prepared to provide additional support by easing monetary policy” should demand growth be insufficient.
It is also worthwhile to note that this period of increasingly low interest rates are not just limited to Australia. Recently, the US Federal Reserve cut interest rates for the first time in 11 years to a target rate of 2.00% to 2.25% and the Bank of England and Bank of Japan are expected to hold their interest rates at a low 0.75% and -0.1% respectively as concerns of slowing economic growth become a global issue.
What impact does this have on Australian households and businesses?
The decision taken by the RBA to reduce the cash rate, allows banks to pass on these cuts to their customers meaning lower interest payments. Businesses can take advantage of the reduced interest rates when acquiring capital assets. Greater consideration therefore should be given to whether these capital assets should be purchased on finance as opposed to being leased. Secondly, for businesses selling outside of Australia, the reduced cash rate may continue to drive down the Australia dollar improving the competitiveness of Australian exports.
For Australian households, this could mean lower mortgage costs for prospective property buyers. In response to the reduced cash rate in July and poor performance in global bond yields, many major banks have reduced their fixed rates which may lead to an increase in cheaper loans available for consumers. As a result, prospective homeowners and investors may be tempted into the market to take advantage of these cheaper loan costs. For property owners, there is likely to be a stablisation in house prices and property values are likely to increase as lower loan costs encourage buyers back into the market.
On the other hand, there are also drawbacks if interest rates are to remain low for an extended period. For individuals and businesses with cash investments, the return on those investments is also likely to drop on the back of the reduction in the cash rate. While households may benefit from the lower mortgage rates, those living on savings, like retirees, or striving to increase their savings may face further reduced interest on their deposits.
Overall, while there appear to be some clear pros and cons as a result of the low cash rate for households and businesses, their total impact depends on your unique situation. As such, should you have any questions on the above, please do not hesitate to contact your engagement partner on 02 9283 1666.