RBA cuts interest rate to a record low – what does it mean for smart investors?

RBA cuts interest rate to a record low – what does it mean for smart investors?

On March 3, 2020, Reserve Bank of Australia (RBA) cut the cash rate to a new record low of 0.50%, for the first time since October. The statement from RBA says, “The Board took this decision to support the economy as it responds to the global coronavirus outbreak.”

Last year, the rates were slashed down thrice to prevent the downturn in the housing market, with residential construction tumbling after a record building boom. 

After the summer bush fires and now with the coronavirus outbreak impacting globally, this is being viewed as a well-intentioned move to support the Australian economy, especially the housing market. 

The Organisation for Economic Cooperation and Development (OECD) has predicted that even a “mild and contained” outbreak of coronavirus would wipe 0.5 percentage points from Australia’s economic growth this year.

With a high risk of potential economic fallout, RBA cut the interest rates by 25 basis points to 0.5 per cent to boost the economy without waiting for any further effects of coronavirus. 

“The coronavirus outbreak overseas is having a significant effect on the Australian economy at present, particularly in the education and travel sectors,” said RBA governor Philip Lowe in his post-meeting statement.

“The uncertainty that it is creating is also likely to affect domestic spending. As a result, GDP growth in the March quarter is likely to be noticeably weaker than earlier expected.”

“Once the coronavirus is contained, the Australian economy is expected to return to an improving trend,” he added. Mr Lowe showed reassurance that once the outbreak was controlled, the economy could rebound quickly. 

Not just this, the board is even prepared to take further steps if the conditions worsen. “The board is prepared to ease monetary policy further to support the Australian economy,” he concluded.

With the chances of a possible pandemic, while making investment decisions can be harder, the lowered rates will surely help home loan customers and seasoned investors who have well-planned their investment strategies. Analysts at RateCity calculate that the 25-basis-point reductions would save a variable home loan customer with a $500,000 loan $70 per month on their repayments.

The effect of this rate cut will be milder on the property market as compared to the first two previous cuts which had a solid impact. There is some increased activity at open homes and auctions for the buyers who have decided and are prepared to make a move in the property market. 

With the changes in the economy, especially when there is a looming threat of a pandemic, it becomes even more crucial to have the right investment strategy. 

As the old saying goes “there are always two sides to a story”, in context of the rate drop announced recently, there are two ways it can impact a smart investor: 

1) Based on the RBA assessment, we believe this would be a good time to take a benefit and grow your property portfolio and is also an excellent opportunity to reduce your debt, as equity (property value MINUS your debt), increases with the reduction of debt and/or increase in your property’s value. This, in turn, will increase your borrowing capacity and increase the net return on rent (positive cashflow/gearing). A good consideration as the future is an unknown.

2) The opposite side of the story is retirement income/savings is virtually nil and therefore, there is no benefit to save money in the bank. It is critical to find other avenues to save money and reduce taxes.

We can help you make informed decisions while gaining the maximum benefits of the current market and rates. Interested to see if this is the right time for you to step into the property market? Reach us for an obligation-free investment strategy session, contact us here.