RBA banks on double-pronged mortgage boost

The Reserve Bank of Australia (RBA) has released its Statement on Monetary Policy from its July board meeting, in which it lowered the official cash rate for the second consecutive month, reducing it to a new record low of 1 per cent.

The central bank outlined its rationale for the rate cut, stating that it would “support the necessary growth in employment and incomes” while also promoting “stronger overall economic conditions”, which it said would “support a gradual increase in underlying inflation”.

The RBA added that it was confident a cut to the cash rate would not pose a risk to stability but added that it “recognised the uneven effect of lower interest rates on different households”.

“Members also judged that the extent of spare capacity in the economy, and the likely pace at which it would be absorbed, meant that a decline in interest rates was unlikely to encourage an unwelcome material pick-up in borrowing by households that would add to medium-term risks in the economy,” the central bank noted.

Reflecting on conditions in the credit space, the RBA noted the decline in home lending growth and pointed to the fall in approvals by both owner-occupiers and investors in the preceding month.

However, the central bank expects its rate cuts and the Australian Prudential Regulation Authority’s (APRA) scrapping of its 7 per cent interest rate floor for mortgage serviceability assessments will improve conditions in the credit space.  

“[An] easing in the loan serviceability interest rate floor was likely to see a boost in borrowing capacity for many new borrowers, which would be in addition to the positive effect on the cash flow of the household sector overall following the reduction in the cash rate at the previous meeting,” the central bank stated.

The RBA’s monetary policy adjustments elicited immediate responses from the market, with credit providers passing on the cuts, either partly or in full, to their home loan customers.

Credit providers have also begun to adjust their interest rate floors for loan assessments following APRA’s announcement, with the likes of ANZ, Westpac and Macquarie reducing their floors to as low as 5.3 per cent.

The RBA concluded by reiterating that it would consider further cuts to the cash rate “if needed to support sustainable growth in the economy and the achievement of the inflation target over time”.

[Related: RBA ‘leaves door open’ to further cuts]