The Reserve Bank of Australia has lowered the official interest rate to 1.75% – a new historic low! This has come as a shock as interest rates have not been changed since May last year.
The decrease to the interest rate was highly influenced by the core inflation rate reduction to 1.5% – the lowest reading on record.
Outcomes based on the new interest rate
Although the interest rate decrease has raised caution in regards to the economy, there are many indicators such as strong labour market conditions, which highlight the moderately paced growth of the economy in 2016.
The interest rate decrease is believed to assist and encourage first home buyers to enter the market as the average standard variable home loan rate (if the major banks pass it on) will be down to 4.52%. This means that homeowners will save $72 a month on a $500,000 loan. As a result, the cut will improve the confidence of buyers as it will allow people to make mortgage repayments in advance and increase mortgage affordability.
NAB, one of the major banks, has made an immediate move and lowered its standard variable home loan.
The Australian dollar immediately fell by 1% to below 76 US cents.
Unfortunately, the interest rate decrease will affect term deposits. Individuals are expected to lose as much as $1250 on a 12-month term deposit of $500,000, or $625 on a $250,000 term deposit.
This outcome will disadvantage retirees or older Australians who are on low, fixed incomes.