After Wednesday’s release of inflation data for the 1st quarter, I predict the Reserve Bank of Australia (RBA) will cut their cash rate by 0.25% on Tuesday the 3rd of May. The cut should be 0.5% but the RBA have been indecisive which has been confirmed by their previous monetary policy statements.

Does the inflation data require a rate cut? I don’t believe so but financial markets will drive the RBA into cutting rates. The expectation of a rate cut for the 3rd of May was sitting at 11% on Wednesday morning to 57% by late afternoon. This will only increase leading into Tuesday.

Chart

With the recent Financial Services Levy introduced to the banks last week and rising funding costs for the banks, its unlikely that the major lenders will pass on a full 0.25% rate cut if the RBA moves. My expectation is for banks to pass on around 0.20%.

By no means will we see a resurgence in lending as the RBA will work together with the Australian Prudential Regulation Authority (APRA) to maintain regulatory restrictions on lenders. We expect APRA to advise lenders to keep the status quo in how banks determine your borrowing capacity. This is to keep a lid on the Sydney and Melbourne property markets.

If you’re thinking of fixing your home loan, quite a few lenders have attractive 3 year rates available. Fixed rates do not follow the RBA cash rate but rather daily lending rates to the banks which fluctuates every day. We have seen some volatility in these rates in the last 3 months and big falls in the last 24 hours. Could fixed rates go lower? Possibly and we will keep our eye on the markets and update you in the future.

The RBA releases their announcement on Tuesday the 3rd of May at 2:30pm with the Federal Budget delivered that night at 7:30pm. Look out for a budget update next Wednesday.

– David Lee

Know someone who this information might interest?

Leave a Reply