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RBA Cuts Official Cash Rate To 50-Year Low

By Rebecca Zhang

The Reserve Bank of Australia (RBA) cut the official cash rate yesterday (August 6) by 25 basis points in its second move to ease interest rates this year.

The new cash rate of 2.5 per cent takes effect today (August 7), and with the prospect of lenders passing on some or all of the cut, home owners could be in for savings on their mortgage repayments.

RBA governor Glenn Stevens said in his statement announcing the decision that the Australian economy had been growing at a rate lower than trend over the past 12 months.

“That is expected to continue in the near term as the economy adjusts to lower levels of mining investment,” said Mr Stevens.

He noted there had been indications of a rise in demand for finance by households, but that overall borrowing had been “relatively subdued”.

“At today’s meeting, and taking account of recent information on prices and activity, the board judged that a further decline in the cash rate was appropriate,” Mr Stevens said.

The new cash rate is the lowest since the RBA began to target inflation with monetary decisions in the early 1990s. Indeed, you’d need to head back to the late 1950s to find a similar level.

The Housing Industry Association called the rate cut “timely” and urged lenders to pass on the savings to borrowers.

“Clearly a rate reduction was needed and we welcome today’s decision,” said HIA senior economist Shane Garrett in an August 6 statement.

“For some time, we have been urging the RBA to reduce interest rates in order to add fuel to what is still a fledgling residential construction recovery.”

He noted that since November 2011, the RBA had cut the official cash rate by 225 basis points, supporting a “modest though hesitant” upswing in residential construction.

Real Estate Institute of Australia (REIA) president Peter Bushby highlighted the potential savings for homeowners.

“If the banks pass it on in full, the average loan repayment would be reduced from $2,106 to $2,006, or by $100 per month,” said Mr Bushby in a statement.

He said that meant the proportion of income needed to service an average mortgage would decrease from 29.9 per cent to 28.5 per cent.

“This is the best level of housing affordability since the December quarter 2009 and will be welcomed by investors who have been returning to the market in greater numbers over past month.”


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