Interest Rate Cuts: What You Need To Know

Interest rates have fallen to a new low today as the Reserve Bank sought to remedy surprisingly weak inflation data.

Reserve Bank has slashed the official interest rate to a new historic low today of 1.75 per cent, with at least one major bank to pass on the cut in full.

rates2“While the quarterly data contain some temporary factors, these results, together with ongoing very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast,” RBA governor Glenn Stevens said.

A drop in the consumer price index coupled with falling consumer sentiment compelled the RBA’s to cut rates and head off a potential deflationary spiral. The big question is whether the banks will pass on the rate cut to customers with mortgages.

CoreLogic spokeswoman Michelle Koper said the last thing Reserve Bank economists wanted to see was “a rebound in the rate of capital gain, particularly in Sydney and Melbourne where dwelling values have already risen 50 per cent and 31 per cent respectively since the rate cutting cycle began in November 2011”.

She also added:  “The spread between the cash rate and standard discounted mortgage rate has been widening since 2008 when there was 1.8 percentage points difference between the two rates. By April 2016 the spread has doubled to be 3.65 percentage points and is likely to widen further if the full rate cut isn’t passed on by lenders to mortgage rates.”

While some have flagged reduced interest rates as further fuel on already overpriced property market fire, LJ Hooker chief executive Grant Harrod welcomed the RBA’s move, saying fears it would cause the property market to overheat were unfounded.

rates“Both the Sydney and Melbourne markets are slowing,’’ Mr Harrod said. He said the cut would encourage first homebuyers to enter the market.

“It will improve overall confidence and allow people to get ahead on mortgage repayments and increase mortgage affordability for everyone, however, we don’t expect to see another huge jump in property prices,’’ Mr Harrod said.

However housing affordability remains a sore point for many. A segment of the community can’t afford to rent a property, let alone buy one. Anglicare’s Australia’s Rental Affordability Snapshot shows the nearly impossible task of securing housing for those on the age pension, the dole, disability or family payments or earning the minimum wage.

The organisation plans to use the findings to lobby the Federal Government and Opposition during an extended election campaign to recalibrate negative gearing and capital gains rules, increase housing stock and the supply of social housing and up welfare payments.

Many of the groups fared better in Rockhampton, Gladstone and Emerald than the national average, while Cairns residents fared worse.

But in Brisbane, there were so few appropriate properties the percentage was recorded as zero per cent in all categories but three. Age pensioners would need to bunk in with students they find on Gumtree to be able to afford even two per cent of rentals on the market.

“Given that share accommodation is typically targeted at younger populations, the likelihood that age pensioners would find that this accommodation meets their needs, or that they would be able to secure this type of rental property is slim,” the report said.

As global economic growth fails to fire generally, negative interest rates are being pursued in a number of jurisdictions including Europe and Japan, and elsewhere rates in many countries are at modern day lows. Part of the reason for this, according to the head of Blackrock, Jerry Fink, is that low interest rates are having the opposite of their intended impact on people in the economy – consumers. Fink said that rather than encouraging consumers to increase debt and spend now, low rates were actually causing savers to fret about their future income, lifestyle and retirement.

rates5“This world of ultra-low interest rates over a lengthy period is a big problem for savers,” Glenn Stevens said in a speech he gave in New York last month.

The bottom line with retirement is that the less we spend now, the more we will have in the future. Pre-GFC when markets and interest rates were all heading north, retirement almost took care of itself.

In a world where interest rates are going to be extremely low for the long term, lifestyles may have to be changed today to make sure there’s enough money for tomorrow.

On that score, here’s something to ponder.

The Association of Superannuation Funds of Australia’s latest retirement standard for a comfortable retirement for a couple is $60,000 a year.

Assuming a 20-year retirement and a return of 6 per cent a year, you will need $729,000 in your super fund.

At two per cent, that rises to $1 million.

Some questions to ask yourself include:

  • Are you saving enough?
  • When can you retire?
  • How much should you have in income producing investments?
  • Will you need to make adjustments to your standard of living?
  • Is it possible to tap into your home equity to help financially?
  • Can I supplement my retirement with social security support?

We can help you navigate the maze of retirement planning. Contact us today to find out how.