Borrowers receive first interest rate cut in four years

Borrowers have been handed their first interest rate cut in just over four years, with the RBA slicing 0.25 per cent off the official cash rate.

For the first time in four years, mortgage holders have been granted a reprieve by the Reserve Bank of Australia (RBA).

The official cash rate was cut by 0.25 per cent, to 4.10 per cent, when the RBA Board announced its decision on Tuesday (18 February).

Remarkably, more than half a million borrowers have never experienced a rate cut.

An owner-occupier with a $600,000 debt, and 25 years remaining could see their minimum monthly repayments drop by $92.

This assumes banks pass on the rate cut in full to variable borrowers, as they are expected to do. The big four were quick to act. CBA, ANZ and NAB immediately announced they would decrease home loan variable interest rates by 0.25 per cent, effective 28 February. Westpac’s cut of 0.25 per cent will take effect on 4 March.

The last time the RBA cut interest rates was November 2020, as part of a policy to stimulate the then-pandemic-stricken economy.

While widely expected, the RBA was still facing a tough decision.

Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance. In the December quarter underlying inflation was 3.2 per cent, which suggests inflationary pressures are easing a little more quickly than expected.

But inflation does still remain outside the central bank’s preferred 2 to 3 per cent range.

The RBA Board’s Monetary Policy Decision statement said upside risk to inflation still existed and hinted that this cut may have to suffice for now.

“Upside risks remain. Some recent labour market data have been unexpectedly strong, suggesting that the labour market may be somewhat tighter than previously thought.

“The Board’s assessment is that monetary policy has been restrictive and will remain so after this reduction in the cash rate.

“Some of the upside risks to inflation appear to have eased and there are signs that disinflation might be occurring a little more quickly than earlier expected.

“There are nevertheless risks on both sides.

“The forecasts published today suggest that, if monetary policy is eased too much too soon, disinflation could stall, and inflation would settle above the midpoint of the target range.

“In removing a little of the policy restrictiveness in its decision today, the Board acknowledges that progress has been made but is cautious about the outlook.”

Canstar.com.au research shows if a borrower with a $600,000 debt and 25 years remaining, kept their monthly repayments at the same amount as they are paying today, and there are four standard cash rate cuts (CBA and Westpac current forecasts) that are passed on in full, this borrower could potentially save as much as $89,143 in interest over the life of their loan, helping them pay off their loan four years early.

Bigger problems than inflation

Most commentators agreed that the RBA had little choice but to cut interest rates at the February meeting.

REIA President, Leanne Pilkington, said the cut will provide a welcome relief to borrowers and first home buyers.

“With the market expecting further cuts during 2025 more relief for borrowers can be anticipated.

“Affordability will also improve with the proportion of family income required to service their loan dropping by 1 percentage point for each cut in interest rates of 0.25 per cent, from the current historically high level of 48.6 per cent.

“With house prices moderating and real wages growing at their fastest rate in a decade, further improvements in affordability can be expected during 2025.”

Associate Professor Mark Melatos, School of Economics, University of Sydney, said monthly inflation readings have fallen precipitously and the December quarter CPI report showed headline inflation within the RBA’s target range.

“While underlying inflation is still slightly above the target range, the trend since the December quarter 2022 has been in consistent decline.

“Any temptation to further reduce the cash rate will be tempered by any upward pressure on house prices, continued full employment and any geo-political inflation shocks.

“The RBA will likely only move to cut rates in a sustained fashion once convinced that underlying inflation has settled in the 2-3 per cent range.”

AMP Economist Shane Oliver said the US election result was a bigger threat to the Australian economy than inflation.

“Underlying inflation is falling faster than the RBA expected and has been running around target over the last six months, economic activity is a bit weaker than expected and Trump’s trade war now poses more risks to Australian growth than inflation.”

But even if the inflation battle was going the RBA’s way, the war was not necessarily over.

Matt Turner, Mortgage Broker, GSC Finance Solutions, said inflation is still falling, however, labour markets are strong and the government is overspending.

“I felt they should’ve held rate steady, even though this isn’t a popular opinion in the finance broking industry, but it would be disastrous for consumer sentiment if they need to increase in future.

“The threat of trade wars and tariffs and a Australian dollar regressing against major currencies is a sign of more inflation to come.

“The RBA cannot afford to get this wrong and I don’t see another quarter of stability as a bad thing in the scheme of the current environment.”