RBA cuts as coronavirus worsens: How will it impact the economy, property market and interest rates?

Following heightened speculation that the Reserve Bank would pull the trigger on interest rates today, the cash rate has been cut to the historic low of 0.50%. But with the impact of coronavirus now on Australian shores, will this move actually make much difference to our economy and property market?
RBA cash rate 3.03.20 - Copy
How will the cash rate impact the economy, property market and interest rates? Image source: Michael Jung (Shutterstock).

The spread of coronavirus dominated discussions about the Reserve Bank of Australia’s (RBA) latest cash rate decision in recent days. Several economists and commentators said the bank’s Board should vote to cut after the Australian share market took a beating, losing nearly 10% last week.

Following the flurry of predictions and speculation in the media, the Board voted to cut the cash rate to 0.50%, leaving little ammunition available for the central bank to support the economy with interest rate stimulus in the future.

RBA Governor Philip Lowe said the decision was largely based on the need to support the economy as it responds to the coronavirus outbreak.

“The global outbreak of the coronavirus is expected to delay progress in Australia towards full employment and the inflation target,” Dr Lowe said.

He said the virus was already hurting the local economy – particularly the education and travel sectors – and that the central bank was prepared to ease the cash rate further if need be.

Canstar finance expert Steve Mickenbecker said the rising unemployment rate, and weak consumer spending, business investment and GDP growth – or lack thereof – were all factors behind the rate cut today.

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But the general feeling of unease about the economy has been rising due to the ongoing drought, bushfires and now coronavirus.

Although most of the fires are now out and the drought has eased in some places, RBA cash rate cuts may not help increase spending due to the unavoidable spread of coronavirus, he said. Therefore, today’s cut might not achieve what it normally might – a boost to the economy in the form of renewed spending.

“Savers will receive less interest and tighten their belt. Banks will be faced with tightened margins and squeezed profitability,” Mr Mickenbecker said.

But what could this coronavirus-induced unease mean for the property market? We take a look.

What will coronavirus mean for the property market?

The global novel coronavirus outbreak is also a “big and rising risk” to the property market, and could create uncertainty for buyers and sellers, according to AMP Capital Chief Economist Shane Oliver, who in the days leading to the Board’s decision tipped the RBA would cut the cash rate.

He said there may have already been a reduction of Chinese buyers in the local property market due to coronavirus, but he believed the brunt the impact on the market was yet to be felt.

“However, if the situation badly worsens globally and the virus takes hold in Australia then it could become a big short-term negative,” Dr Oliver said.

He said the economy could slow even further, and fall “potentially into recession”. He said the recent loss of sharemarket wealth could drag on property demand, which could be hit even harder “if people put off buying property along with other activities for fear of catching the virus”.

Further RBA cuts could potentially help boost the number of people buying property once fears of the coronavirus spread come under control, he said.

CoreLogic head of research Tim Lawless said the latest cash rate cut might not boost housing demand and price growth, partly because it’s unlikely to be fully passed on in mortgage rates.

“Lower interest rates would normally be a catalyst for an acceleration in housing demand and value growth, however there is less certainty that this will add fuel to the housing market in the current economic climate,” Mr Lawless said.

How are interest rates faring for borrowers and savers?

In the past month, Canstar has seen nearly 250 cuts to interest rates on home loans on our database, with the vast majority of those made to fixed loans.

There were 225 fixed home loans cut, by an average of 0.26 percentage points, and 24 variable loan rate cuts, by an average of 0.15 percentage points.

Before the RBA announcement, the average standard variable home loan rate for owner occupiers paying principal and interest was 3.81%, while the minimum was 2.69% (comparison rate 2.71%).

Banks typically follow the cash rate movements as a guide to set interest rates on their products, which is why we’ve seen mortgage rates going down, but experts such as Mr Lawless say it’s increasingly unlikely banks will pass on all future rate cuts given rates are already so low.

Despite this, non-major banks including Homestar, Athena and 86 400 announced within minutes of the RBA’s decision today that they would pass on the full rate cut to their home loan customers.

As for savers, Canstar saw a continued downwards spiral in interest rates in February, with 19 institutions reducing rates for their term deposits. The lowest term deposit rate to lock in your cash for one year is now 0.80%, while the highest is 1.43%.

Online savers have seen falls of an average 0.15% for ongoing base interest rates. Most of the major banks – Westpac, National Australia Bank and ANZ – slashed interest rates on savings accounts earlier this year.

While the major banks, in particular, have been lowering their savings rates, neobank customers have been earning up to 2.25% on their savings deposits at Up, Xinja and 86 400, while Volt offers 2.15%.

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