Rates Cut For First Time in 16 Months

The Reserve Bank of Australia (RBA) has used its first board meeting of 2015 to cut rates to 2.25%. This is the first time in 16 months that the rate has been cut.

There was much speculation in the lead up to the cut, given the long period of stability. The cross-current of factors like the strong housing market and the performance of the Australian dollar in recent weeks had led to commentators and forecasters to predict in both directions. The recent slide of the Australian dollar to below US79c for the first time in over five years has contributed to the RBA's decision to cut.

The rate cut is good news for current mortgage holders, with even more good news to come with industry sources are pointing toward a further decrease in rates in 2015. However Loan Market Chairman, Sam White has shared concern around the long term effect new cuts to the interest rate will have on house price growth , "Today's rate cut is certainly a game changer for the property market. Together with limited supply of new properties on the market, the RBA's decision will most likely prolong strong sales results. However, the issue remains around the long term sustainability of the market if the current imbalance between supply and demand of houses continues."

Mr White explains that while late last year there was talk rates could rise, the future looked a little less certain with the release of new data leaving forecasters to predict a fall. "It's a case of who you ask at the moment. Industry forecasters are predicting rates will drop in the short term, but the bank economist are keen on the idea long term rates will rise. The safest bet right now in this period of uncertainty is to prepare for the eventual rise."

For some time now the RBA has expressed a need to bring stability to the Australian economy and has shied away from altering rates since August 2013. Reserve Bank Governor Glenn Stevens believes continued accommodative monetary policy should provide support to demand and help strengthen growth over time.

The key for mortgage holders is to pay off what they can now ahead of the eventual cash rate rise predicted in the future. "While the change is expected to be gradual, it may peak in a couple of years time," Mr White said. "The more prepared home owners are now, the more time and money they can save on their mortgage in the long run."

With fierce competition between lenders continuing, those in the market, or looking to enter it, are in an enviable position to negotiate good terms. "Speaking with a local mortgage broker about their current situation is the best first step a property owner can take in getting prepared for an eventual rate rise. Being on the right deal can make all the difference in the long run." Mr White said.

The RBA board will meet again on Tuesday 3 March, 2015.