As the global economy continues to face challenges, including rising trade tensions and ongoing conflicts in the Middle East, the Reserve Bank of Australia (RBA) is under increasing pressure to adjust its interest rates.
Recent market analysis suggests that the RBA could deliver up to 3.9 rate cuts over the next 12 months, bringing the total reduction in rates to 1.5 percentage points. This projected change has sparked questions about the typical scale of rate cuts and their implications for Australian households.
A historic perspective on RBA rate cuts
According to historical data, the magnitude of the potential rate cuts is considerable, but not unprecedented. Looking back to the 1980s, during the 1983-1985 cycle, mortgage rates fell by 14.8%, while the smallest reduction during this period occurred in 1975, with just a 2.3% cut.
However, it was in the 1990s and during the Global Financial Crisis (GFC) that the largest cuts occurred, with reductions of 48.5% and 42.8%, respectively.
These substantial cuts were tied to periods of economic crises, which is what makes the current expectation noteworthy—if realised, these rate cuts would not be associated with an emergency or recessionary environment.
The average reduction in mortgage rates since 1959 stands at 26.6%. However, when isolating periods without a crisis, the average cut is slightly smaller, at 27%.
By these historical standards, the expected 1.5% reduction over the next year falls within a more typical range, though it’s still noteworthy for occurring in an environment that is not driven by a crisis. The RBA is likely to take a cautious approach, balancing global economic pressures with domestic stability.
The implications for Australian households
Rate cuts of this magnitude are expected to ease the financial burden on households by reducing the cost of mortgage repayments. However, the extent of this relief may be less than in past cycles.
According to the Commonwealth Bank’s report on May retail sales, Australian household spending remains weaker than economic fundamentals would suggest, indicating that the impact of the rate cuts on consumer consumption may not be as substantial as hoped.
The reason for this lies in the structure of mortgage repayments. The proportion of the repayment allocated to principal has risen in recent years, meaning that the savings from lower interest rates now make up a smaller proportion of total mortgage costs.
Although rate cuts may lower interest repayments, they may not provide the same level of relief as seen during previous cycles, particularly in the 1990s and the GFC period. While these cuts could stimulate the economy, their impact on households is likely to be more subdued.
