What does the RBA Rate Announcement really mean to you?
Articles about interest rates pop up all over your news feeds on the first Tuesday of each month except January.
Economists and Industry fortune tellers and spokespeople speculate on whether the RBA will raise or cut interest rates. This will go on until 2:30pm (AEST) when the RBA finishes the meeting and releases a media statement outlining the decision regarding the CASH RATE TARGET....
Sometimes, although infrequently, we then hear news that the banks have passed on the full amount of the rate cut to people who have borrowed money off those banks. This may mean that we will have a little bit extra in our pocket each month for that awesome item that we have been watching on eBay for the past few weeks which is ending soon....
But often we hear that those evil people in their ivory towers haven't passed on any or the full amount of the rate cut and just keep it all for themselves. Then they give some lame reason like; "Not all of our funding comes from the RBA.."
Is that really true? If they don't cut their rates, does it mean you should refinance to another lender? Change to a fixed rate? Or just go with the flow until your bank tells you otherwise?
Firstly, let's have a look at the mechanics of the RBA, how they set interest rates, and why we should care.
What does the RBA Interest Rate really mean?
The interest rate that we hear announced each month is the Official Cash Rate (OCR). This is the term used in Australia and New Zealand for the bank rate, and is the rate of interest at which the central bank charges on overnight loans to commercial banks. This allows the Reserve Bank of Australia and the Reserve Bank of New Zealand to adjust the interest rates in each of the nations economies. Every bank is made to settle all inter-bank transfers overnight so the central bank can regulate the rate paid for cash.
The Reserve Bank is able to directly influence the cost of overnight lending between banks, however, overnight borrowing only makes up a fraction of the bank's' total borrowing - more than half of the bank's funding these days comes from depositors. These are people who put money in the bank and expect, in return, to be paid interest.
The bulk of the remaining funds comes from borrowing money from other banks and investors over longer periods than overnight. Roughly half of this "wholesale funding" comes from domestic sources and half from offshore.
Why does the Cash Rate matter to you?
Put simply, if your mortgage costs you less, you'll have more disposable income to spend.
What impact do RBA Interest Rate changes have on you?
The RBA does provide some influence on rates, even if it is only a small part. If the rates weren't being affected to their liking to help either slow or speed up the economy, then the RBA could keep going with either increasing or cutting rates until it had an effect that they were after.
Are more Rate Cuts likely in the future?
Your guess is as good as ours. However, many economists believe that more cuts could be on the cards this year. Whether or not any of these anticipated cuts will be passed on, is another question altogether.
So what should I do now?
We always tell our clients to make sound and informed decisions, in consultation with their broker, taking into account their own set of goals and objectives for their financial future and nothing else.
Speculating on whether or not rates will be cut or not is likely to get you nowhere fast. There's just no way of predicting the future that we know of, and while you wait and gamble on something that may or may not happen, big opportunities could be passing you by.