The Reserve Bank has cut rates after nearly three years to a new record low and have hinted at more cuts on the way.
In good news for borrowers the RBA also poured some pressure on the banks to pass the rate cut on in full to customers, although so far the response from the banks has been mixed.
“Yes, this reduction in the cash rate should be fully passed through to variable mortgage rates,” RBA governor Philip Lowe said in Sydney.
The central bank moved to cut rates based on evidence that indicated inflation is set to stay under their 2-3 per cent target regardless.
The main thing concerning the RBA is that the ongoing low inflation rate perpetuates a cycle of falling house prices and deteriorating economic activity.
“If inflation stays too low for too long, it is possible that inflation expectations move lower – that Australians come to expect sub-2 per cent inflation on an ongoing basis,” Dr Lowe said.
Fears about this new rate cut driving up household debt again have diminished and as a result, the RBA acted this month.
“Over the past few years, one concern has been that lower interest rates could add to the medium-term risks facing the Australian economy as a result of high household debt,” Dr Lowe said.
“We need to keep a close eye on this issue, but this concern has receded recently.”
“Lending practices have been tightened considerably and many lenders have become quite risk averse.”