After wrong-footing most market watchers in March and April, the Reserve Bank had little choice but to cut rates this time around.
The need to further stimulate the economy has outweighed concerns that another rate cut will add fuel to the house price boom in Sydney and, to a lesser extent, in Melbourne.
The quarter of a percentage point cut takes the cash rate to 2 per cent, and a record low.
It is the second cut this year, after rates were last cut by a quarter of a percentage point in February.
Data from researcher Canstar shows that on a $300,000 mortgage taken over 25 years the monthly savings in repayments from this latest rate cut are almost $45. That is based on the average of the four big banks’ standards variable interest rates.
Inflation is of little concern to the Reserve Bank given annualised underlying inflation is running roughly in the middle of the Reserve Bank’s target range of between 2 to 3 per cent.
The lower cash rate should help weaken the Australian dollar and help offset falling commodities prices by making Australian exports cheaper for foreign buyers.
There is evidence that the Reserve Bank’s last cut in February is working. It seems to have helped stimulate demand for home construction and retail spending.
Of course, housing construction helps to create more jobs. Job ad volumes, as measured by ANZ’s monthly series, are running at two-and-a-half year highs.
While the Reserve Bank’s role is to help manage the national economy, the rate cut is likely to drive Sydney house prices even higher and increase household indebtedness.
Just because the Reserve Bank has topped up the punch-bowl with even cheaper money doesn’t mean that consumers should be filling-up their cups with more debt.
Rising prices are going to make it even tougher for first home buyers to get a foot hold into the market.
Australian Bureau of Statistics data analysed by finder.com.au, found the average home loan size for first home buyers has increased by $121,000, or 58 per cent, over the past decade to $331,000.
Then there is the potential banana skin waiting for everyone who is loaded-up to the eyeballs with mortgage and other debts: namely, a return to normal cash rate levels. It may be some time down the track, but rates will go up.
Some market economists are expecting the cash rate could even start rising by as early as the start of next year.
But if rates do stay lower for longer, those retirees with big exposures to interest-paying investments, such as term deposits, are going to feel the pinch the most.
Those retirees with self-managed super funds, in particular, may be among the biggest losers from the rate cut.
They tend to be under-diversified with a typical asset allocation of about 30 per cent is in term deposits and fixed interest.
When the term deposits come to maturity, they will be rolling over into lower-yielding term deposits.
On the other hand, DIY funds have a typical exposure to Australian shares of about 40 per cent.
And lower rates should be a positive for the sharemarket. Less than 10 per cent of the money held inside DIY funds is invested in international shares, which have been outperforming Australian shares.