What happened to the cash rate in February?

If you’re looking to take out a home loan, you’ll be aiming to take advantage of a low rate to make repayments affordable as possible. Observing the cash rate set by the Reserve Bank of Australia (RBA) is one way to predict where interest rates are going. It can help you decide whether you should opt for a variable, fixed or split rate product.

So, what cash rate decision did the RBA decide for February?

No change

For the eighth month in a row, the Reserve Bank has left the cash rate unchanged at 2 per cent. This is a historical low that has persisted since May 2015, and reflects the government’s views on where the economy needs to go. With this in mind, what reasons were cited in the accompanying media release?

RBA Governor Glenn Stevens said that “available information suggests that the expansion in the non-mining parts of the economy strengthened during 2015”. This of course was a core objective of the Reserve Bank since the original rate cut last year. Low interest rates were intended to heighten borrowing and spending, which would go on to drive business growth.

Figures from the Australian Bureau of Statistics show that in December 2015, the labour force grew by 27,500 workers, while the number of unemployed dropped by 9,900. Looking at it from a yearly perspective, trend estimates peg employment growth at a healthy 2.7 per cent in the 12 months to December. This equates to 312,200 more new employees in the Australian workforce.

Clearly, the low cash rate has been helping to stimulate business expansion, which is reflected in the strong rise of new employment opportunities. As the economy continues to shift thanks to its “spare capacity grow”, as Mr Stevens has said before, the cash rate will likely hold or even drift lower, giving businesses the wings they need to keep reaching for new heights.

Will there be a cut?

There has been plenty of speculation about which way the RBA will take the cash rate, but many are predicting a cash rate cut sometime soon. There are several reasons why 2016 is being seen as an opportune time for such a decision.

One major factor surrounds housing affordability issues that have arisen in several capital cities. The Housing Industry Association’s (HIA) Affordability Index for the December 2015 quarter decreased by 6.4 per cent to a rating of 75.6. This is a result of climbing housing prices, particularly in key cities like Sydney and Melbourne.

Were there to be a rate cut earlier, it would have worsened the situation for buyers. Interest rates may have plummeted in step with the monetary policy decision and caused property demand to surge even more greatly. This would, of course, push real estate prices up.

However, price growth has cooled significantly in the past few months thanks to tighter lending restrictions set by the Australian Prudential Regulation Authority (APRA).

A February 2 release by CoreLogic RP Data reveals that from a quarterly perspective, the median dwelling price in Sydney dropped by 2.1 per cent, which is great news for people looking to apply for a home loan. As Head of Research Tim Lawless said, “the housing market is playing out exactly as the RBA probably would have hoped: losing steam without a collapse in values”.

Furthermore, with real estate prices being reined in, it gives the RBA more freedom to further cut the rate should the government see fit. With inflation continuing to remain low, it might just be on the cards for March.

If you have any questions or would love to get your hands on some financing, don’t hesitate to contact the lending professionals at Border Bank.