US cuts rates: Here’s what it means for Aussie mortgage holders

The US Federal Reserve approved its second consecutive interest rate cut on Thursday night, though experts have some disappointing news for Aussies.

The US cutting rates for the second time in two meetings will have global market implications, but might not have the impact mortgage holders are after.

The Federal Reserve cut its key interest rate Thursday 25 basis points to a new range of 4.5 to 4.75 per cent.

Rate cuts by the US Federal Reserve and other central banks put pressure on Australia to follow as the value of our dollar will increase as a result, which would impact the nation’s export markets.

However, Reserve Bank governor Michele Bullock indicated the board would not move on the cash rate while demand was still above supply and the labour market was on “the tighter side”.

“Right now, we believe that settings are restrictive and we need to keep rates restrictive for the time being,” Ms Bullock said.

“The board needs to be confident that inflation is moving sustainably towards the target and we need to see more progress on underlying inflation coming down.

“We’re watching the data closely and we’re not ruling anything in or out.”

Independent economist Saul Eslake pointed out just because central banks around the world are cutting rates, it does not mean Australia needs to follow.

“When you consider Australia never raised rates as much as the US, UK, Canada and New Zealand and unemployment has risen in Australia by as much as it has in those countries,” he said.

.The US Federal Reserve reducing the cash rate is unlikely to have an impact on the RBA Picture: NCA NewsWire / Nicholas Eagar

Mr Eslake did say there is positive news for mortgage holders.

“Australians are getting tax cuts that in aggregate are the equivalent of the two 25 basis points albeit distributed differently across households” he said.

While the US is cutting due to inflation rate falling to 2.1 per cent, just above the target range, in Australia it still remains elevated.

Australia’s annual inflation rate fell from 3.8 per cent to 2.8 per cent in the September quarter, the first time in three-and-a-half years it has been below 3 per cent, with Australia running a target range of between 2 to 3 per cent.

But the Reserve Bank of Australia said it focuses on underlying inflation, which strips out the more volatile components, including a sharp fall in energy prices due to federal and state government rebates.

Thursday’s move reduces the Fed’s benchmark rate to a range of 4.5 per cent to 4.75 per cent, down from a decade high level of 5.25 to 5.5 per cent just two meetings ago.

The rate cut follows a larger half-point reduction in September, and reflects the Fed’s renewed focus on supporting the job market as well as fighting inflation.

“Since earlier in the year, labour market conditions have generally eased, and the unemployment rate has moved up but remains low,” the Federal Reserve said in a release.

“Inflation has made progress toward the Committee’s 2 per cent objective but remains somewhat elevated.”

Mortgage holders are likely to still have higher for longer rates both in Australia and the US. Picture: NewsWire/ Monique Harmer

Commonwealth Bank’s chief economist, Stephen Halmarick, said the new President could see rate cuts slow in the future.

“We share the widely held view that the policy agenda of the returning President Trump presents upside risks to the inflation outlook in the US,” he said.

“As a result, we have adjusted higher by 50bp the expected low point in this Fed easing cycle from a range of 3.00‑3.25 per cent to 3.50‑3.75 per cent.”

Originally published as US cuts rates: Here’s what it means for Aussie mortgage holders