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How the RBA new rate changes things.

by DFS Ipswich on July 4, 2019 No comments

RBA cuts interest rates to a new low of 1% amid a slowing economy, prompting big four banks to respond

The Reserve Bank has cut interest rates to a historic low of 1 per cent, as it stares down the twin issues of rising unemployment and a slowing economy.

Key points:

  • The RBA has made its first back-to-back rate cut since the European bank crisis in 2012
  • Governor Philip Lowe says the cut will assist in reducing unemployment and lifting inflation to the 2-to-3pc target band
  • ANZ, CBA, NAB and Westpac will pass on varying degrees of cuts to customers

The 0.25-percentage-point cut follows a move at last month’s meeting and is the first back-to-back cut since 2012, amid fears of a global financial meltdown flowing from European banks.

ANZ was the first major bank to react, announcing it would pass on the 25-basis-point rate cut in full to all of its variable home loan customers.

The Reserve Bank’s decision was largely expected, with the market pricing a roughly 80 per cent chance of a cut ahead of the RBA board meeting.

The odds of another cut had been shortening since RBA governor Philip Lowe told the market last month that one cut was unlikely to deliver the fall in unemployment the bank is looking for.

The Reserve Bank has recently indicated it views a 4.5 per cent jobless rate as close to full employment.

Unemployment has been steadily rising in recent months, from a trough of 4.9 per cent earlier in the year, and stood at 5.2 per cent in May, while GDP growth has fallen to just 2 per cent — the weakest reading since the immediate aftermath of the global financial crisis 10 years ago.

Dr Lowe said on Tuesday that lower interest rates could help advance the RBA’s goal, and did not rule out further cuts.

“It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target,” he wrote in his post-meeting statement.

“The board will continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”

The Reserve Bank governor said international economic risks, especially from the trade war, also contributed to the decision to lower rates further.

“The outlook for the global economy remains reasonable,” Dr Lowe noted.

“However, the uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy are tilted to the downside.”

A lot of mortgage customers risk being ‘short-changed’

ANZ variable home loan customers did not receive the full 25-basis-point rate cut in June, with the bank criticised for only passing on 18 basis points, but they will receive this month’s rate cut in full.

“We looked at a number of factors before reaching this decision, including business performance, market conditions and the impact on our customers,” ANZ executive Mark Hand said.

“On balance, we believe this is the right decision for our home loan customers and for our business.”

Australia's big four bank logos: Commonwealth, National, ANZ, and Westpac.


Commonwealth Bank passed on 19 basis points to owner-occupiers and investors for principal and interest loans, and the full 0.25 per cent cut to its interest-only loans.

It also passed on a 0.15 per cent cut to NetBank Saver accounts.

“We have carefully considered how to respond to this latest official interest rate cut, given that it is not possible to pass on the full rate reduction to over $160 billion of our deposits, including deposits where interest rates are at or already near zero,” Commonwealth Bank’s Angus Sullivan said in a statement.

“We have made a deliberate choice to limit the interest rate reduction to 0.15 per cent per annum on our most popular savings account, NetBank Saver.”

NAB also announced a 19-basis-point reduction across the board on its variable home loan interest rates, following on from its 25-basis-point reduction in June.

Meanwhile, Westpac announced it was reducing variable interest rates for home loan customers, including a 20-basis-point cut for owner-occupiers and a 30-basis-point cut for investors with interest-only repayments.

Combined with last month’s rate cut, those hypothetical borrowers could now be saving $1,389 and $3,472 a year, respectively.

RateCity’s research director Sally Tindall said many banks would hesitate before passing on this second rate cut in full — some banks chose not to pass on last month’s rate cut in its entirety.

“Banks are getting jammed between the competing interests of borrowers, depositors and profit margins,” she said.

“The reality is, a lot of variable rate customers might find they get short-changed by their bank on the back of today’s cut.

“Call your bank and find out what they intend to do.

“If you’re an owner-occupier paying down your debt, and you’re on a rate higher than 3.5 per cent after this cut, you might not be getting value for money.”

Prior to Tuesday’s RBA move, a couple of large second-tier lenders were offering three-year fixed home loan rates for lower-risk owner-occupiers of 2.99 per cent.

On the share market, investors are concerned it is the banks that will be short-changed, with the big four all down about 1.5 per cent in late afternoon trade.

That is because as interest rates head towards zero, and competitive and political pressures push for most of the cuts to be passed on, investors are concerned that bank profit margins will have to share more of the pain with depositors.

The Australian dollar remained largely unchanged following the rate cut because it was so widely anticipated.

By business reporters Stephen Letts and Michael Janda (9News)

General Advice Warning
Past performance is not an indicator of future performance. The information provided in this article is general in nature and does not take into account your particular investment objectives, financial situation or insurance needs; we, therefore, recommend you seek advice tailored to your individual circumstances before making any specific decisions.  Dobbrick Financial Services and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306.  Innova Asset Management is a Corporate Authorised Representative of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357 306.

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DFS IpswichHow the RBA new rate changes things.