Winners and losers
On 3 March 2020 the Reserve Bank of Australia (RBA) made the decision to lower the official cash rate by 25 basis points to 0.50%.
RACQ Financial Advocacy Analyst Nathanael Watts reveals how the decision will impact Queenslanders.
Rate cut winners
If you have a mortgage, or any type of variable loan, you are set to save on your home loan repayments. The RBA cash rate is one of the components that determines the interest rate on your home loan, so when the cash rate is reduced banks are likely to reduce your mortgage interest rate.
The 25 basis point rate cut that occurred is set to save the average Queenslander with a mortgage of $397,000 more than $600 over a year*.
Check with your bank to find out how much of the rate cut will be passed on to you.
One way to think of interest rates is as the ‘cost of money’. This means money becomes ‘cheaper’ when interest rates go down. Everyone loves a bargain, so ‘cheap’ money encourages people to borrow more to spend on big ticket items like buying or building houses.
Interest rate cuts also help businesses to make larger profits as they use less of their revenue to pay off debt. More profitable businesses encourage investment in the share market which can increase the price of shares.
As money is ‘cheaper’ when interest rates are low, businesses are more likely to take out loans to expand by purchasing new equipment or larger premises. An expanding business often means hiring more staff which can cause the unemployment rate to drop.
Rate cut losers
While an interest rate drop is good news for borrowers, it can be bad news for savers and investors.
Retirees who have term deposits will find that the interest rates on offer are lower than before when it comes times to reinvest. This means less money for retirees who rely on the returns as a source of income.
Retirees who are reliant on income from superannuation may choose to reduce their exposure to high risk investments in favour of low risk, low return options. Low risk options usually contain a large investment in cash, so a reduction in interest rates will also mean a reduction in returns from this investment option.
People may find it difficult to save in a low interest rate environment as their money won’t grow as quickly. This can make it more difficult for first home buyers enter the property market as it will take longer to save for a home deposit.
The lower cash rate means Australia is a less attractive place to invest in compared to other countries. Investors may choose to invest elsewhere which can lead to a drop in the demand for Australian currency. This will lead to a fall in the value of the Australian dollar and a lower exchange rate which makes it more expensive to import goods from overseas.
The information in this article has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in the document is general advice and does not take into account any person’s particular investment objectives, financial situation or needs. Before acting on anything based on this advice you should consider its appropriateness to you, having regard to your objectives, financial situations and needs.