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Interest Rates Dives to Historic Low of 2%

ladstone Observer, Tuesday May 5th 2015.

THE Reserve Bank has cut the official interest rate by 25 basis points to 2% as predicted by economists.

The cut could save a borrower with a $300,000 mortgage around $47 per month in repayments if it is passed on in full by the banks.

At its monthly meeting today, the Board lowered the rate to the historic low, sighting Australia’s ‘falling trade terms’ as one of the reasons.

“The global economy is expanding at a moderate pace, but commodity prices have declined over the past year, in some cases sharply,” a statement released by the RBA read.

“These trends appear largely to reflect increased supply, including from Australia. Australia’s terms of trade are falling nonetheless”.

“The Federal Reserve is expected to start increasing its policy rate later this year, but some other major central banks are stepping up the pace of unconventional policy measures. Hence, financial conditions remain very accommodative globally, with long-term borrowing rates for sovereigns and creditworthy private borrowers remarkably low.”

The Australian dollar initially dipped following the RBA’s decision but has since bounced back.

The cut is effective as at May 6, 2015.

CoreLogic RP Data head of research, Tim Lawless says the RBA is in a tough position, trying to stimulate economic growth without adding more fuel to the housing market demand.

“The Sydney and Melbourne housing markets are already responding to lower mortgage rates; since the previous interest rate cut in February,” said Mr Lawless

“CoreLogic RP Data have reported auction clearance rates moving to new record highs and the annual trend in capital gains has rebounded higher after moderating over most of 2014.

“The RBA are clearly prepared to look through the strong housing market results, as they should be well aware that the high rate of capital growth is evident only in Sydney where dwelling values are up 14.5% over the past twelve months and Melbourne where values have moved 6.9% higher.

“Every other capital city is recording annual growth in dwelling values of less than 2.5%.

“With mortgage rates now moving even lower we are expecting dwelling values will continue rising, however it is hard to imagine the high rate of capital gain in Sydney won’t start to moderate over the coming months as investor demand is curbed by tougher lending standards for investment loans and also by diminishing rental yields and affordability.

“Potentially we may start to see stronger housing market conditions in cities like Brisbane and Adelaide where capital gains have been relatively muted over the past two cycles of growth.”

YOUR home loan repayments could be just a touch cheaper after today with the Reserve Bank of Australia expected to cut rates when the board meets later today.

It would be the second time this year the RBA has cut rates.

That February reduction was the first time in 18 months that the RBA felt compelled to tinker with the figures.

If it is cut, those paying off an average mortgage of $300,000 over 25 years would save less than $50 a month.

Financial news network Bloomberg found 23 economists out of 27 were predicting interest rates to tumble another 25 basis points or a quarter of one percent, bringing the rate to an all-time low of 2%.

To put this number into context, when the cash rate was first established in 1990, it sat at 17%.

It gradually fell throughout the 1990s and into the noughties, with a few exceptions, reaching a record low of 3.5% in late 2009 as the Global Financial Crisis began to bite into Australian industry.

The rate briefly recovered, but returned to 3.5% in October 2012 and has been gradually falling since.

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