RBA Governor warns cash rate won’t drop any further

Mortgage interest rates are unlikely to drop any further after the head of the nation’s central bank warned the benchmark that influences them has bottomed out.

When the Reserve Bank of Australia (RBA) cut the cash rate to 0.10 per cent on Tuesday, it lowered it to a level not seen in 30 years of documented history.

To get it that low, the board members had to cut it by 0.15 per cent from 0.25 per cent, which was atypical because the rate is traditionally cut at quarter-of-a-per cent increments.

Other countries have lowered the cash rate into negative territory, a point of inflection where banks pay customers to finance money from them and in turn charge them fees.

But the head of the RBA has repeatedly said it’s “extraordinarily unlikely” negative interest rates will be seen in Australia. In fact, he’s said the 0.10 per cent cash rate is as low as it’ll go.

“The board is not contemplating a further reduction in interest rates,” Governor Philip Lowe said, in a Statement on Monetary Policy released today.

“... interest rates have been lowered as far as it makes sense to do so in the current environment.

“The board considers that there is little to be gained from short-term interest rates moving into negative territory and continues to view a negative policy rate as extraordinarily unlikely.”

It looks like it’ll ‘bottom out’ for a while

The cash rate, a guardpost that guides interest rates on mortgages and savings accounts, will likely stagnate at 0.10 per cent until the economy recovers, Mr Lowe said.

“The board has committed not to increase the cash rate target until actual inflation is sustainably within the target range of 2–3 per cent,” he said.

“This will require a period of strong employment growth and a return to a tight labour market.”

The COVID-19 pandemic plunged Australian into its first peacetime recession since 1930, leading to a quarterly contraction of 7 per cent, locking down states and shuttering businesses.

The unemployment rate is expected to idle at 8 per cent by the end of the year, Mr Lowe said, well above its longtime level of 5 per cent.

Lowering the cash rate is one relief measure intended to help people spend less money servicing their mortgage.

Big four banks choose not to pass the rate cut on

Australians who hold a variable rate mortgage with Commonwealth Bank, ANZ, NAB or Westpac won’t benefit from the reprieve the most recent rate cut could provide. This is because these banks are not passing it onto existing customers.

Combined, these four banks have about 467,000 people presently unable to resume their mortgage repayments, according to APRA’s September data.

A person with a $500,000 mortgage being charged interest at 3.19 per cent over 30 years would save $41 a month -- or $489 a year -- if the rate cut was passed on and their interest rate dropped to 3.04 per cent.

And the savings would be greater had these banks passed on the preceding rate cut to existing customers, but the only one to do so was ANZ.

The cash rate has dropped 1.25 per cent since June last year, but according to a RateCity analysis, the banks have passed only 0.86 per cent on average to existing customers.

Several smaller lenders have passed the savings onto existing customers. These include:

The banks with the lowest interest rates on owner occupier loans are as follows, as of the time of writing.

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