Updated: Oct 30, 2020
The odds of another interest rate cut appear to be increasing by the day, with financial markets pricing in a 75% chance that the RBA will slash rates further on Melbourne Cup day.
The chance of another cut, that would see rates fall from 0.25% to 0.1%, have been increasing since RBA Governor Phillip Lowe, made it clear that further easing was on the cards.
Governor Lowe suggested that under normal circumstances, interest rates would have been further reduced, in a bid to help boost employment and the overall economy. However, we all know that these are far from normal circumstances.
2020 has been a year that has seen the cash rate already fall to record low levels. When COVID initially hit, the RBA moved swiftly on two occasions, cutting rates from the then level of 0.75% to 0.5% and then to 0.25%.
Despite the sharp reduction in interest rates, the case for more rate cuts and how that might play out going into 2021 is still up in the air.
The first consideration is that the RBA has made it clear previously that 0.25% is its lower bound. This means that below this point is where the effectiveness of rate cuts begins to diminish.
Even if we do see a cut to 0.1% at the November meeting, the odds of that getting passed along to a standard mortgage holder are low. If it does, it is not likely to be meaningful. Clearly, on this front, there is not much incentive to further cut rates at this time.
That said, the RBA Governor made it clear that they would not be focused on the 2-3% inflation target going forward. With inflation remaining sluggish well before we ever saw a trace of COVID, the RBA started linking its policies to employment or more specifically the unemployment rate.
Thanks to COVID the unemployment rate has ballooned to 6.9%, however, it was as high as 7.5% only months ago. The RBA has been looking for that number to fall below 5% and even then, that might not be enough for them to wind back their easy monetary policy.
With the Federal Government slowly reducing their stimulus programs such as JobKeeper and JobKeeper and mortgage holidays slowing getting phased out over the next three to six months, there’s every chance the RBA will keep rates as low as possible.
Their goal is to get the economy moving and by their own admission, they are prepared to do whatever it takes.
Ultra-low or even negative rates don’t just impact homeowners and investors, but they also help support businesses of all levels, through lower rates on business loans, which are crucial to keeping jobs in place.
Low rates also put downward pressure on the exchange rate which also boost the economy given Australia’s high level of exports. Lowering the exchange rate is something that can often happen, simply by talking about the possibility of a rate cut and some believe, this could have been one of the motives surrounding Deputy Governor Debelle’s recent commentary.
What does this all mean for property investors?
The reality is that the current low interest rate environment is already starting to lift property prices in a number of areas.
Outside of Australia’s two largest metro markets, Sydney and Melbourne, all other capital cities and major regional markets saw price gains last month according to CoreLogic.
The large price falls that were speculated about early on have simply not eventuated. In fact, Westpac Economics recently came out and suggested that all the capital cities in Australia will see growth of around 15% between 2022-2023.
They expect Brisbane and Perth to lead the way with 20% and 18% gains over that period of time.
On the surface, it appears the RBA are getting ready for a prolonged period of ultra-low rates - certainly through 2021 if not longer. Melbourne Cup day might even be the next move lower for interest rates.
While property investors might not see much more in terms of savings on their mortgages, it’s clear that it is not only helping property prices hold strong but it more than likely will be a key ingredient for price growth in 2021 and beyond.
Rowan Crosby is a Research Contributor at Wealthi. He is a published Australian journalist with opinions on Australian real estate, worldwide stock markets and commodities. Rowan has a particular interest in small-scale property development and investing.