Why is the RBA cutting rates and what does it mean for me?

The Reserve Bank of Australia (RBA) at its October meeting has once again cut interest rates, with the cash rate now sitting at an all-time-low of 0.75%. This is the third cut we’ve seen within six months, and speculation suggests the rate may be headed for the chopping block again in future.

Are you wondering what this change could mean for you and your finances? There are a few key factors that can determine whether these cuts will have an impact on your finances and the economy.

Why did another rate cut happen?
Let’s look at what actually happened and why. The official interest rate of the RBA has been cut to 0.75%. This is a quarter-percentage drop from the most recent cut in July, which was already a record low.

The RBA controls interest rates and changes them for economic reasons. Generally speaking, they raise rates to slow the economy and cut them to stimulate the economy. At present unemployment rates are high and continue to rise, so the RBA has made cuts in the hope that employment rates will improve alongside consumer spending. Basically, consumers need to flash more cash to see the interest rate rise.

But are the banks onboard?
While the RBA controls the official interest rate, that doesn’t mean banks have to take it on board. The RBA has come out with a few statements strongly encouraging the banks to adopt the rate cuts and pass them onto their customers. During the most recent slash, all the Big Four complied – passing on only a portion of the 0.25 cut.

Now it’s just a waiting game to see if future cuts occur, or if one of the banks chooses to pass on the full cut. If that happens, it will be a domino effect– they will all be forced to lower their rates. As of now, they’re holding strong.

Will we see more rate reductions?
Whether we see further rate reductions depends on how far the RBA is willing to hedge their bets on monetary policy (the act of using interest rates to influence the economy). Monetary policy has become weaker over time – it used to do the trick, but now it’s a bit hit and miss.

Fiscal policy, on the other hand, uses government revenue to influence the economy by building infrastructure, implementing tax cuts and handing out money. Fiscal policy generally packs more of a punch than monetary policy, but that doesn’t mean the RBA will give up their current course of action.

It’s not going to come as a great shock if the RBA slashes interest rates again – despite the record low. Whether or not that happens hinges on the flow-on effects of the current rate cuts.

Will the reductions have any impact?
The goal behind the rate cuts is to stimulate the economy, but we’re going into unchartered territory – continued rate cuts haven’t been proven to achieve this goal in other developed countries. In these instances, the banks haven’t been forced to adopt the reduced interest rates and that seriously weakens their impact. There is the possibility these rate cuts will reduce unemployment and encourage consumer spending, but in all likelihood, the government will have to step in with fiscal policy to make this happen.

How you can benefit from the low rate environment?

Lower interest rates on loans.
Just because the big four banks are reluctant to pass on the rate cuts, it doesn’t mean that all banks are. Some banks are offering competitive rates, which means it’s a good time to shop around.

Chat to us and see what kind of rates you could be getting in the market right now, as lower rates mean that switching banks could be a good financial call.

Expand your investment portfolio
When you have a low rate environment you discourage the main form of investment, which is savings. If saving becomes unfavourable you might want to consider investing your money elsewhere such as in the share market.

Explore other avenues of investment to determine what the best investment mix is for you based on the current rates and your personal circumstances.

Stay up to date
Understand what’s going on in the economy so that you can plan ahead. If you’re planning on buying a house, look for the best deal. By keeping up to date with the interest rates you can plan for your investment future.