Reserve Bank of Australia
A worker walks past the Reserve Bank of Australia (RBA) building in central Sydney in this October 6, 2009 file photo. Reuters/Daniel Munoz

The nightmare of Australian banks and retirees just became a reality with the decision on Tuesday by the Reserve Bank of Australia (RBA) to cut interest rate to a historic low of 1.5 percent. It was the second time in 2016 that the Australian central bank reduced the key lending rate by 25 basis points.

The reason behind the decision to cut the rate – which experts believe the banks would no longer pass to home loan borrowers – is to address Australia’s low inflation rate which hit a 17-year low. The Australian Bureau of Statistics reported on Wednesday, July 27, that the country’s inflation rate was only 1.1 percent compared to 12 months ago, the lowest since 1991, reports The Australian.

The RBA decision was in line with economists’ forecast on Friday of a 64 percent chance of a rate cut, which grew to 72.7 percent on Tuesday morning. Besides the weak inflation rate, signs of a slowdown in home prices also favoured another rate cut just three months after the RBA reduced the key lending rate to 1.75 percent in May.

In a comment on the anticipated rate cut, Clancy Yeates wrote in Sydney Morning Herald that the interest rate reduction would be bad news for Australian banks, although it would make borrowers happier. Also affected by the decision are retirees whose savings accounts had been diminished by the 12 rate cuts since 2011.

Graham Cooke, insights manager at Finder.com.au, a comparison website, explains the positive impact of the interest rate cut on borrowers. “If you had a $300,000 mortgage with an average standard variable rate of 4.93 per cent and manage to get the full discount of 0.25 per cent off your interest rate, this could pocket you almost $50 per month, or a whopping $16,325 over the life of your loan.”

But Canstar points out the reverse effect of the RBA decision on savers with a 12-month term deposit with an average interest rate of 2.58 percent. It reckons a 25 basis point rate cut would cut their income, for a $300,000 deposit, by $750, while those with a $500,000 deposit would suffer a $1,250 reduction.

It is “another cruel blow to retirees,” anticipates finance commentator Alan Kohler. He wrote on Monday, “Self-funded retirees are being forced into riskier and riskier assets to try to add some meat to the three veg on their dinner plates, so [RBA] Governor [Glenn Stevens] and his colleagues can do their macroeconomic duty,” quotes News.com.au.

VIDEO: RBA Cuts Interest Rates

Source: 7NEWS

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