The recent cut to official interest rates by 25 basis points (or ¼ pf 1%) down to 2.25% pa could result in the following.
Cheaper Home Loans and Increase in Property Prices
All four major banks have now cut their standard variable mortgage rates. On the flipside, this can mean property prices will be higher due to increased competition. However, lower consumer confidence, tighter lending conditions and relatively low rental yields may not see this eventuate.
Boost in Consumer Confidence
As around half of Australians have mortgages, a cheaper mortgage will leave households with more disposable income. A household with a $300,000 mortgage over 25 years will save about $43 a month where the interest rate comes down by 25 basis points. This in turn may boost consumer confidence.
Weaker Australian Dollar
A rate cut has a tendency to lower the exchange rate on the local currency. This is because for overseas investors, potential returns available on assets that earn interest will decrease, lowering the demand for the Australian dollar.
The lower dollar should give a boost to local companies exporting to other countries, as their products become cheaper. The local tourist industry should also benefit through increased overseas visitors. This also means that imported goods could become more expensive as will overseas travel.
Rising Share Market
A cut in rates means that term deposits are comparatively less attractive, companies should be more profitable as borrowing costs are reduced, and so making returns on shares more attractive. Rising shares in turn means an increase in household wealth as nearly every Australian owns shares through their superannuation accounts.
Cheaper Business Credit
A rate cut is likely to further encourage business investment.
Bad News for Savers
A cash rate cut will be a blow for anyone with large deposits in their savings account, as the return on their savings is likely to decrease in line with the cut. This is likely to hit retirees who rely on savings in particular, who will be left with less disposable income as they earn less interest on their savings.
Five years ago, savers could earn as much as 8 per cent on a five-year term deposit. Today the return for term deposit is closer to 3 per cent. A rate cut is likely to drag down the returns on term deposits even further.