At the start of this month the Reserve Bank of Australia (RBA) cut official cash rate by 0.25% to a record low of 1.25%. The rate cut was implemented in response to a slow-down in economic growth which has been caused by the housing downturn and threats to global economic growth such as the US-China Trade War, which is yet to reach a conclusion.
The purpose of a rate cut is to increase economic growth. By cutting the cash rate, this lowers the incentive for Australians to save which hopefully results in an increase in spending to help boost the economy. If the economic slow-down were to continue we would expect to see an increase in unemployment and also a slowdown in wages growth. Therefore, by cutting the cash rate the RBA is trying to avoid this.
The direct effects of this rate cut to most Australians will be a decrease in the interest rate on their home loans. This will free up some cash flow or allow Australians to pay down more of their home loan or have more disposable money to spend. Self-retirees, who typically have money invested in term deposits, will notice a lower interest rate on their accounts.
In the next couple of months we are expecting that there will be one more rate cut and two more next year. This will bring the cash rate to a record low of 0.5%. We are also expecting share markets to continue to remain volatile due to the uncertainty around global growth.
As always, if you would like more information as to how the latest cash rate cuts will affect you and how you can best position yourself, please do not hesitate to contact our office on 03 9938 3890.