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August interest rate and lending environment update

In the August meeting of the Reserve Bank of Australia (RBA), the board decided to drop interest rates to another record low of 1.5 percent. While inflation remains low, the RBA is using the opportunity to drive further business investment and encourage consumer spending.

The economy is in a unique situation at the moment. Typically rates are cut in order to stimulate the economy, with a trend of falling rates usually indicating an economy in serious need of a boost. The Australia economy, however, is reasonably robust and not showing signs of faltering. While some key indicators are lower than optimum, overall the unemployment rate is steady, exports are increasing and domestic demand is strong. Curiously, inflation remains low and this is a key area that the RBA is focusing on at the moment.

The media is placing a lot of attention on the banks’ refusal to pass on the full rate cut to borrowers, with the major banks dropping their rates from 0.10% to as much as 0.14%. The banks have cited increased funding costs as well as a more expensive regulatory regime. We haven’t seen any material changes in credit policy over the past month, with deposit levels remaining the same. Bank serviceability rules have not changed since the rate drop, so lending levels are not significantly changing.

The fall in rates is resulting in more activity, with more applications coming through. Without a significant increase in the pool of funds available to lend, banks are not having to lower lending standards in order to attract sufficient business. This is also the case in the commercial space, where record low interest rates have led to a spike in enquiries and a number of them turning in to applications and settled loans.

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