This past week, the Reserve Bank gave mortgage holders the relief that my company has been calling for over the past six months. It’s a welcome reprieve and one that is long overdue. But in my mind, the decision is less about reducing rates and more about bringing back the confidence that so many Australians had lost since last Melbourne Cup Day’s rate hike shock. It’s about creating a ‘wealth effect’.
Simply defined, the wealth effect is the impact that positive sentiment can have on the economy when individuals feel wealthier. This can translate into increased retail spending, business expansion and even higher borrowings. This concept might seem a little foreign because no matter where you’ve looked in the last year or so, there’s been plenty of data released to reinforce negative sentiment – and precious little from the RBA to give you a break. Since last Melbourne Cup Day the RBA has been jaw-boning about the prospect of rates rising, not falling. So no wonder consumer confidence is so low.
Since then we’ve seen falling house prices, falling sharemarkets, falling superannuation balances, no interest rate relief, rising default levels from small businesses and so the list goes on. If that wasn’t enough, the hard evidence came in the form of a much lower than expected CPI figure for the September quarter. This provided tangible evidence of our slowing economy and an undeniable reason for the RBA to cut.
So now we’ve finally been given some much needed relief this week with a cut in the official cash rate of 0.25 per cent, taking it to 4.5 per cent. This is welcome news to the four million households in Australia with a mortgage. Yellow Brick Road made our guarantee to pass on rate reductions in full a week ago, and we were the first. We’ve consistently pressured the RBA in various social media outlets to give Australians a break and to acknowledge that the vast majority of Australians are struggling with interest rates that have been too high for too long. We’ve had real time information on this as we’re on the street talking with Australians every day.
While the cut will help sentiment around the country and release the pressure valve on many household budgets, this will only happen if your lender passes their savings on to you too. Please be vigilant about this and call your lender to ask if you will be receiving the full benefit of the cut. And if your bank won’t cut your rate, it might be time for you to take a look around for a better deal. Plenty of lenders are looking for good customers.
* Mark Bouris is the Executive Chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting & tax and insurance. Email Mark on firstname.lastname@example.org with any queries you may have or check www.ybr.com.au for your nearest branch.