It used to be a surprise when Australia’s Reserve Bank changed the official cash rate. Not any more - and it is more with a “finally” than surprise that greeted the Reserve Bank’s announcement.

The Reserve Bank has dropped of the cash rate of 0.25% to 7.00%, down from 7.25%, and thus ending 7 years without an official interest rates cut. Anyone who taised a mortgage since 2001 in Australia have never had an interest rate cut!

The major banks have backed off threats of not dropping the retail rates to reflect the cash rate and the major banks: Commonwealth, ANZ, Westpac and NAB have all dropped their floating rates by 0.25%. St George Bank went a step further dropping their prime rate by 0.30%

RBA Governor Glenn Stevens made this statement:

”The evidence is that the tight financial conditions, in conjunction with other factors including higher fuel costs and lower asset values, have exerted the needed restraint on demand.

Indicators of household spending have recorded subdued outcomes over recent months, and credit expansion to both households and businesses has slowed.”

Increasing fuel and food prices may have done their job of restraining demand and cooler the strong domestic Australian economy. This may not be the last official interest rate cut either. The RBA has a difficult balancing act with the mining sector, in particular, remaining strong while much of the rest of the economy contracting, particularly manufacturing. The Australian dollar strengthened on the back of the RBA news.

There are mixed comments in the sector as to whether further rate cuts are to be expected, they are certainly not guaranteed unless there is a sudden weakening in the mining and related sectors. As usual property investors require a crystal ball to predict mortgage rates and are much better off applying dollar cost averaging principals to interest rate management: where they always run a number of loans with different fixed terms thus mitigating any significant change in interest rates.

Photo Credit: David D Muir