RBA Cut: 7 predictions for October 2019

The RBA has cut interest rates for the third time this year. So what’s in store for homeowners, savers and everyone else?

After a record 34 months of no activity, the RBA started slashing the cash rate this year. With three down, what’s around the corner? Here, I’ll round up seven predictions for the Australian economy following the October 2019 cash rate cut.

1. There are more cuts to come

Economists are, on the whole, saying that we will see one more rate cut. When we asked our panel of 45 leading economists how low the cash rate will go before it starts to recover, the vast majority picked a bottom of 0.50%. The next cut could come as early as February, with most economists expecting a cut by then.

Predictions from our panel of 45 leading economists on how low the cash rate will go.

2. Economic sentiment will continue to decline

Every month, we ask economists if they have a positive or negative outlook on five key economic indicators. This month saw the lowest positive result we have seen for employment and wage growth, clocking in at 14% and 6% respectively. This follows a recently reported increase in unemployment numbers in Australia. While over 34,000 new jobs were added to the economy last month, the majority of these were part-time jobs. Meanwhile, the number of full-time jobs is declining. Higher unemployment generally holds back wage growth.
Positive sentiment of economists across five key economic indicators.

3. The housing market won’t turn the corner just yet

With accelerating property price increases in Melbourne and Sydney, we asked economists how long they thought it would take for house price changes to turn positive in other cities. The results varied from five to nine months.

  • Brisbane: 5 months
  • Canberra: 5 months
  • Hobart: 7 months
  • Adelaide: 7 months
  • Perth: 8 months
  • Darwin: 9 months

It’s worth noting here that new CoreLogic data released today shows that prices have increased by 1.7% in Sydney and Melbourne, 1.0% in Canberra and 0.1% in Brisbane. Are we on a roll? Higher stock volumes along with increasing prices would be more convincing.

4. Quantitative easing may be on the cards

Quantitative easing (QE) is what a central bank does when they run out of options; when they decide that cash rate cuts alone will not be enough to stimulate the economy. In a QE process, the central bank will create new cash and use it to decrease – or ease – the cost of borrowing.

They do this by using the new cash to purchase safe investment options like government bonds, which drives down the interest rate on these products and makes them less attractive for investors. Investors are then more likely to look at higher risk investment options, like the stock market. The new cash is later removed from the economy as it recovers, by selling the bonds and deleting the profits.

One-third (31%) of our panel of economists said QE was likely to be introduced. While this may not seem like much, it is a significant increase on the 19% who cited it as a possibility only last month. This comes on the back of RBA governor Philip Lowe saying recently that “unconventional” options may be used if the economy warranted it.

5. The stock market could do well

Despite all the doom and gloom, Australian shares have been doing well. While the ASX closed down yesterday, it has been on a general upward trend since the bottom of the GFC in 2009. Indeed, the total value of the ASX 200 – the top 200 companies on the Australian stock market – is about double now what it was in 2009. If quantitative easing does come into effect, expect the stock market to jump as it did in both the EU and the US when QE was introduced in those markets.

6. Mortgages will become cheaper

*Average loan size in Australia.

Lower interest rates will mean savings for homeowners. With $635 per year back in the pockets of the average homeowner following this cut alone, there will be more cash to spend. The Reserve Bank will be hoping households spend that cash, rather than siphoning it off into savings accounts.

7. Traditional savings accounts will continue their downward slide into redundancy

Big banks have been pushing the rate of interest earned on old-fashioned savings accounts down. As explained in a previous blog, this is likely to encourage customers to switch to bonus savings accounts. However, these tend to have restrictive conditions such as only offering the bonus rate if funds are lodged and not withdrawn each month. While the average traditional savings rate currently sits at 0.45%, the bonus account rate is slightly higher at 1.75%.

The cash rate, savings account rate and bonus savings account rate compared.

Non-restricted bonus accounts

Many of the smaller online banks offer higher bonus interest rates that have less restrictive conditions. In general, if you open a transaction account and do your day-to-day banking with these banks, that’s enough to unlock the bonus rate. There are no specific investment requirements here – once your wages are deposited, you’re free to withdraw them or otherwise use them as you see fit. While these products are not monitored by the RBA specifically, the average rate across five of the best right now is 2.39%.

So how much extra can you actually make?

According to a Finder survey of 5,000 Australians conducted from May to September 2019, the average person saves around $650 per month and has $28,500 in their savings account. Based on these savings, the highest rate accounts generate a significant $3,091 in interest, a lot more than the $542 generated by old-fashioned savings accounts. Even in a low-interest world, it’s worth investing a little bit of time to make sure you’re getting a good rate.

from finder.com.au

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