Interest rates at fresh low

The Commonwealth Bank has been the first of the big four banks to confirm it will pass on the RBA’s February interest rate cut in full, with Westpac announcing soon after it would cut its standard variable rate by 28 basis points.

The Reserve Bank dropped the cash rate to a record low 2.25 per cent at its February meeting, following nearly 18 months at 2.5 per cent.

The CBA will cut its standard variable rate by the full quarter of a percentage point on February 20.

It also announced it would cut interest rates on its five-year fixed home loans by 30 basis points to match the rates for its three-year fixed loans.

The NAB and ANZ were still reviewing their rates. A 25-basis-point cut would save borrowers about $47 a month on an average $300,000 home loan.

Analysts and economists have predicted the RBA’s move to cut interest rates, intended to put downward pressure on the currency and promote growth, will further boost demand for homes and drive up property prices.

Interest rates decision

The cut would help keep inflation within the RBA’s target range of 2-3 per cent, said RBA Governor Glenn Stevens.

“The CPI recorded the lowest increase for several years in 2014,” Mr Stevens said.

“This was affected by the sharp decline in oil prices at the end of the year and the removal of the price on carbon. Measures of underlying inflation also declined a little, to around 2.25 per cent over the year.

“With growth in labour costs subdued, it appears likely that inflation will remain consistent with the target over the next one to two years, even with a lower exchange rate.”

Mr Stevens said while recent falls in energy prices could be expected to offer “significant support” to consumer spending, the decline in the terms of trade was reducing income growth.

Focus on property

The fall in interest rates was widely anticipated, being priced at close to a 70 per cent probability in futures markets.

However CommSec chief economist Craig James said that with dwelling starts and house prices at record highs, the RBA could arguably have left interest rates on hold. At 2.5 per cent, the cash rate was at a 54-year low.

“Another rate cut will further boost demand for homes and drive up prices,” he said.

“And if the Reserve Bank wants to generate greater growth, it is unlikely to stop at just one rate cut. So the cash rate could very well have a ‘1’ in front at some point in 2015.”

CoreLogic RP Data property analyst Tim Lawless said the cut, if passed on, would take the typical standard variable mortgage rate down to 5.7 per cent, and the more usual discounted interest rates to 4.85 per cent on average.

“Lower mortgage rates have the potential to add some fuel to what are already strong housing markets,” he said.