The Interest Rate Cuts from the Reserve Bank of Australia have different effects on society. The four major banks have managed to answer these changes implemented basic standard variable mortgage rates one after another.
Many, but not all, would benefit from this interest rate cut
changes. There still some that would not be benefited or feel that these
changes would be a disadvantage on their part. The interest rate cut is a very
important move because as we know, there are so many borrowers in Australia and
most of them are having difficulty when they are already dealing with the
housing repayments. The level of indebtedness in Australia is also increasing
and it also means that the interest rate cut has a stronger impact than it used
to be in previous years.
There have been speculations whether or not the RBA (Reserve Bank of Australia) would cut interest rates once again to boost Christmas sales. The speculations have already been cleared as the RBA has already decided. The RBA Has Announced Their Official Cash Rate In Time For Christmas during its last meeting of the year held on Tuesday (December 2, 2019) to hold official interest rates steady as it waits to see if the economy closes out 2019 on a positive note.
The bank decided to hold the official cash rate at a record
low of 0.75% in line with the financial market and economist expectations.
The market has already expected that the RBA to let its
rates steady with the prediction that the bank would wait to see how the
Christmas and New Year spending activity will affect the economy, before making
another decision early next year. This just explains that there are still open
possibilities for future cuts if the low cost of borrowing and tax cuts fail to
stimulate the economy.
RBA Governor Philip Lowe has stated, “Outlook for the global economy remains reasonable”, adding that “while the risks are still tilted to the
downside, some of these risks have lessened recently”.
“Given these effects
of lower interest rates and the long and variable lags in the transmission of
monetary policy, the board decided to hold the cash rate steady at this meeting
while it continues to monitor developments, including in the labour market, and
is prepared to ease monetary policy further if needed to support sustainable
growth in the economy, full employment and the achievement of the inflation
target over time,”
“The main domestic uncertainty continues to be
the outlook for consumption, with the sustained period of only modest increases
in household disposable income continuing to weigh on consumer spending,”
he added.
He also noted that “The
low level of interest rates, recent tax cuts, ongoing spending on
infrastructure, the upswing in housing prices and a brighter outlook for the
resources sector should all support growth.”
Property prices and investors appear to have been the
biggest beneficiaries of the RBA’s 0.25% interest rate reductions in June,
July, and October.
It is a term of an overall economic decline and is usually
followed by an immediate decline in the stock market, an increase in
unemployment, and a drop in the property market. A recession is normally less
serious than depression. It is a decrease in economic activity over a certain
period of time.
The Impact Of
Recession On The Following Economic Factors
Supply And Demand
Though the Central Bank has other means to adjust the interest rate, it still doesn’t have full control of it. The laws of supply and demand are reasonably affected by interest rates. During a period of recession, people will usually choose to save their money because of their lack of confidence.
Most people usually are expecting to lose their jobs so they hesitate to spend or borrow, and instead, they chose to borrow. As a result, there is more supply of money than demand in borrowing. During a period of recession, a paradox of thrift is deemed, it is because the consumers chose to save their money rather than use it for consumption, and this causes the recession to get worse.
It is not a bad thing to save, however, if all people chose
to save, they further limit the decision of consumers to spend, thus it makes
the recession more severe.
Borrowing
While there is a decline in the economy, the demand for borrowing is also decreasing. A lack of demand drives interest rates to decline. Furthermore, the monetary policy employed by the central bank in times of recession is to increase the supply for money to reduce interest rates. Low-interest rates boost economic activity through consumer spending and investment in business and cheaper financing with low-interest rates.
When there is economic growth, the demand for money
increases, and it influences the interest rate to drive upwards.
On the other hand, the economic downturn affects the
downward impact on interest rates. Therefore, interest rates during a recession
tend to drop, and this is because the inflation rate is low, and the central
bank would like to deal with and encourage the economy.
Essentially, lower interest rates should help the economy
from recession, as it reduces the cost of borrowing, and it should promote investment
and consumer spending.
Property Values
During a recession, with unemployment continuously increases, it is expected that most of the people will not be able to afford their mortgages, and therefore we can observe home repossessions. In this situation, an increase in the supply of housing but a decrease in the demand is expected.
Investment
The investment will drop as companies minimize on taking risks and uncertainty. Borrowing can also be more difficult at this time banks are short of cash.
It comes, and it goes, that is what recession is all about.
There are periods of recessions that are more severe and last longer than the
others. However, as they say, there is always a rainbow after the rain, and
therefore, a recession always ends. When problems in the economy are solved, it
is always followed by economic growth.
We will try to let you understand what Negative Interest Rates truly mean and how does it affect the lives of an ordinary citizen.
Interest rate cuts have been one of the principal means by
the Central Bank in adjusting their monetary policies. Thus, every time there
is a crisis, the initial solution of the central bank is to lower their
interest rates. If the interest rates are already at zero, and the economy is
still not well functioning as it intended to be, therefore, the traditional
policy of cutting the interest rates into negative will not also work.
Open banking refers to large, traditional banks opening up the data they have on customers in order to allow new products and services to be created, supporting all of that up with strict technical standards.
In essence, it allows customers to share their financial
transaction data with authorized third parties, and allow authorized third
parties to accept payments from their bank accounts.
Home Construction Loans allows a new home to be built
through the term of construction. It is based on the time needed to build a
home, and it usually ranges from 6 months to a year. Once your construction
loan is approved, your lender will pay your builder every period, after work is
completed. As soon as the home construction ends, your loan repayment begins.
Most first home buyers prefer having their home construction
loan be combined with their standard mortgage plan, into something termed as a
construction-to-permanent loan. This avoids the need to refinance after
construction and go through 2 different closings.
A Savings rate is defined as the value stated as a percentage or ratio, that an individual can deduct from his or her net income for the purpose of saving it for retirement. That particular amount of money is usually put invested in very low-risk investments such as money market funds or for a retirement account.
What Are The Factors That May Affect Savings Rate?
Savings rates tend to reduce as populations age. In this
case, they chose to spend their money rather than saving them. Interest rate
policies can also affect the decision of the people. Some other factors
include:
Confidence
Consumer confidence can affect the savings rate. If the
households could feel negativity towards the economic opportunities,
consequently, they will prefer to save more and focus on paying off their
debts.
Financial Status
When a credit crisis happens, credit can’t be obtained
easily. Therefore, financing will decrease, and people will choose to focus on
saving. On the contrary, a greater chance of credit, and an increase in work
productivity can cause a lesser chance of saving.
Wealth
Another factor that
can lower savings rates is the increase in wealth. People usually save to buy
properties such as their own home. The housing market has a big influence on
saving in Australia. Increasing house prices promotes mortgage equity
withdrawal, and at the same time, an increase in spending. Conversely, a
decrease in house prices has the opposite effect.
Net Income Growth
Savings rates can be affected by wage growth. Negative net
income growth will result in a decline in the savings rate. As a result, people
will spend through financing and from their savings.
The Effect Of Savings Rate Cuts
Economic experts believe that a higher interest rate can
lead to lower overall expenditures and higher savings. It is because the substitution effect
outweighs the income effect.
Substitution Effect
Lower interest rates substitute saving for spending. It
implies that a cut in the interest rate also means a drop in income as these
people receive lower income payments. It will attract consumers to hold their
cash rather than spending it. For instance, if a pensioner relies on interest
payments from saving, he may decide to save more with the intention of
maintaining his target income from his savings.
Income Effect
The amount of spending is based on income. Lower interest
rates make saving less attractive. However, some consumers may react to lower
interest rates by saving more so as to maintain their standard of living. On
the contrary, some consumers may spend more if their income increases and they
may spend less if their income drops.
Based on the latest news from RateCity, ANZ and NAB have reduced their savings rate again. The cutting of the savings rate intends to make financing at a lower cost for consumers and businesses. It also promotes spending and strengthening the economy.
The effect of lower mortgage rates will fail to stimulate lending within Australia unless banks will ease their credit policies, which were tightened in the midst of investigation from the banking royal commission.
Managing director of the Finance Brokers Association
of Australia (FBAA) Peter White, has said Reserve Bank of
Australia’s rate cuts isn’t enough to stimulate the housing market on their own,
especially as banks use unrealistic credit criteria to push legitimate buyers
out of the market and disadvantage borrowers.
During the FBAA’s annual conference,
White said, “We need a more considered approach to credit policy because right
now there are borrowers with the capability to pay a mortgage that is being
rejected for a variety of reasons.”
White stated that banks are beginning to take action as they continue to
lose business, citing Commonwealth Bank’s recent decision to lower its floor
rate the second time in four months as an example.
“Banks are being forced to act
because the market is flat, and we will no doubt see that other banks will
follow,” he added.
“The FBAA has said before that the
buffer used by banks is ridiculously obstructive to borrowers.
“In no way am I suggesting we loosen
the credit criteria, but in an economy that needs stimulating, interest rate
cuts are only a part of the solution.
He then concluded, “Denying legitimate and credible borrowers a loan due to credit policies that make no sense doesn’t help anyone.”
The Most Common Factors Affecting Housing Demand In
Australia
1. Affordability
An increase in income means that people can afford to spend
more on housing. Within the time of economic growth, demand for houses are
expected to increase. Also, the demand for housing tends to be a luxury good.
Thus, an increase in income causes a bigger percentage of growth in demand.
