Cash rate to drop to record low of 1.25%

June 2019 Cash Rate drop.

At its June meeting, the Reserve Bank Board decided to lower the cash rate by 25 basis points to 1.25 per cent. The Board took this decision to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.

The outlook for the global economy remains reasonable, although the downside risks stemming from the trade disputes have increased. Growth in international trade remains weak. The increased uncertainty is affecting investment intentions in a number of countries. In China, the authorities have taken steps to support the economy, while addressing risks in the financial system. In most advanced economies, inflation remains subdued. Unemployment rates are low and wages growth has picked up.

Global financial conditions remain accommodative. Long-term bond yields and risk premiums are low. In Australia, long-term bond yields are at historically low levels. Bank funding costs have also declined further, with money-market spreads having fully reversed the increases that took place last year. The Australian dollar has depreciated a little over the past few months. It is at the low end of its narrow range of recent times.

Seeking Growth

The central scenario remains for the Australian economy to grow by around 2¾ per cent in 2019 and 2020. This outlook is supported by increased investment in infrastructure and a pick-up in activity in the resources sector. This is partly in response to an increase in the prices of Australia’s exports. The main domestic uncertainty continues to be the outlook for household consumption. The outlook is being affected by a protracted period of low income growth and declining housing prices. Some pick-up in growth in household disposable income is expected and this should support consumption.

So, what does all this mean for you?

The property slump continues but the hopes are for a return to normality post the federal election. Already there are signs of increased interest in property, if not yet increased activity. With negative gearing remaining as a valid tax strategy for at least a few years ahead, the way is clear to resume your earlier property strategies. The problem at the moment is the lack of stock. Those already listing properties for sale have now sold as buyer confidence has kicked in. Other potential sellers are holding off waiting to see if a resurgence will occur. As always, the property market will find its own balance between supply and demand soon.

For now the general feeling is upwards, not to the giddy heights of a few years ago, but nevertheless upwards.

Banks easing criteria

The banks have felt the impact of their own tougher lending criteria and are now starting to loosen the purse strings. It hasn’t been in the banks’ interest to cease to lend, after all that’s how they make their money, by lending. So, there is some relaxation there.

Should the cash rate remain low, people will be tempted to borrow to acquire and with demand exceeding supply, prices will rise. This is only a problem if you plan to buy; knowing when to commit. You’re nervous about going too soon, but worried that if you defer, prices will get away from you.

Long term investors can revel in the low cash rate as it offers a once-in-a-decade opportunity to acquire at low interest rates. Now could be the time to lock in and reap the benefits. If you’ve committed to loans a few years ago, now is the time to consider whether your current loan is the right one for you. It may be time to refinance if your financial position is strong enough. If not, don’t refinance all, but at least part of your borrowing.

Feel free to give Noel or Amanda a ring on (03) 9585 7555 to discuss your situation.

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