Impact of interest rate cut on mortgages, rents, and BHP’s profits amid economic recovery signs and trade tensions. But what about business?
In Short
An expected interest rate cut may help mortgage holders by increasing disposable income but could also reduce savings interest for homeowners. Meanwhile, BHP reports a profit drop but remains optimistic about demand despite global economic uncertainties.
As the RBA meets to cut interest rates by .25%, the change in cost of money will affect individuals based on their financial circumstances. For some, it’s the start of a new era of hope, for others, it’s too little, too late.
The covid 19 pandemic, and government actions since have taken the country’s economy on a rollercoaster ride it didn’t need or ask for. It was the second half of 2019 that economists were warning that Australia may need to look at quantitive easing. How times change. Even the RBA governor was unable to predict just how drastic the inflation bubble would be.
Housing costs play a vital role. Approximately one-third of Australians have mortgages, typically on variable rates. A rate cut may increase disposable income for these borrowers, but just how they will spend that extra cash is circumstantial. For many, it will be spent just the way it is now – getting on top of their mortgage. For others, they’ll be looking at returning to a ‘normal’ life – going out for dinner, and even visiting the supermarket, which is more and more seen as a luxury these days.
Rental market
Around one in three Australians rent, and many rental properties are mortgaged. Lower mortgage costs could relieve pressure on rental prices, though rents rise due to demand and supply issues.
Homeowners, comprising nearly one-third of the population, may see reduced interest earnings on savings due to a rate cut. They often have significant assets benefiting from higher rates currently.
How many cuts?
Predictions on the number of potential rate cuts vary among major banks. Commonwealth Bank and Westpac anticipate four cuts, NAB expects five, while ANZ predicts two. These forecasts may change post-RBA meeting depending on economic outlook.
So how are our businesses doing? Well big business has had a rollercoaster ride too.
BHP remains optimistic about product demand despite economic uncertainties, citing resilient performance in the US and growth in India. An interim dividend of 50 cents per share has been declared.
But for small business, it’s going to take a lot more than one rate cut to strike up the engine. What has always been a delicate balance has swung too far in the wrong direction for a lot of businesses. And while rate cuts may inspire more spending in the economy, there are too many other factors, notably government policy, that businesses need to see change before they’re willing to invest heavily again.
Ahron Young is the Founder and Managing Editor of Ticker.
