Coming up on the SBS On the Money podcast: the Reserve Bank cuts interest rates for the first time since November 2020, what it means for you, your mortgage, your savings and investments. Plus we speak with the CFO of BHP.
Hi everyone, it is your daily 10-minute business and finance news for this Tuesday, the 18th of February 2025. The Australian share market fell today by 0.7% despite a rate cut from the Reserve Bank. We'll have the details with Michael McCarthy from MooMoo, plus the CFO of BHP, Vandita Pant. But first to that Reserve Bank decision to cut interest rates for the very first time since November 2020 to 4.1%, that's a 25 basis point reduction. For the details I spoke with the chief economist at HSBC, Paul. Paul, ultimately, why did the RBA cut interest rates?
Well, the main driver of this was that they got a downside surprise to inflation and inflation is moving a little faster than they thought towards their target. So they felt that they had just enough evidence to be able to lower their cash rate by 25 basis points. But as they pointed out, their cash rate is still above what they'd call is neutral, so it's still actually contractionary. It's still weighing on the economy, it's just weighing on the economy a little less than it was.
The RBA expects underlying inflation to come down faster than first thought, as you mentioned, 2.7% by June 2025 and then stay there for the next couple of years. So we saw that in its statement on monetary policy. But am I right in thinking that assumes three interest rate cuts? Can I get your thoughts on that, and what are the risks to that?
Well, that was exactly what the RBA was messaging today in what they delivered. So they now think that inflation on their main measure, the trimmed mean, gets to 2.7% and tracks sideways at that level, so it doesn't get back to their 2.5% target. But that assumes, of course, that the cash rate is cut in line with the market pricing, which is three more cuts. So what they're explicitly saying is they disagree with market pricing. They don't think that if the cash rate was cut by that much they would actually get back to target. So they're really trying to give a pretty clear message that you shouldn't expect as many cuts as the market's currently pricing.
Any indication on where to now? What's the vibe there? What did the RBA suggest about whether or not we'll see more interest rate cuts, and then what do you think?
Well, I think that's exactly the message that the RBA is delivering, which is they've just delivered a cut but we shouldn't expect another follow-up cut for a little while. The economy is still operating at really close to full capacity, the unemployment rate's expected to track sideways at 4.2%, which is quite a low level, and inflation is still set to be in the target band but it's still going to be in the upper part of the target band. So we shouldn't expect too many more rate cuts anytime soon, and that's our central case as well. We think the next move is likely to be another cut that we get in the third quarter of this year, and then we think there'll be one more cut in the early part of 2026, and that's it. So that would give you three cuts in this cycle, and that I think is consistent with the messaging we're getting from the RBA as well.
Okay, that is the chief economist at HSBC, Paul Bloxham. Let's now take a closer look at what this interest rate cut means for mortgages. So someone with a $600,000 home loan, which is for an owner-occupier over 25 years paying principal and interest, and with a variable rate of 6.32%, that $600,000 loan would see new minimum monthly repayments of $3,892, that would be a reduction of about $92. Obviously if your loan is higher you get a bigger cut. So for example if your home loan is $1 million, your new minimum monthly repayment would be $6,486, and that's a reduction of $154 per month. Obviously it all depends on whether or not your bank passes on that rate cut in full. A few moments after the RBA decision we did hear from each of the big four banks which agreed to pass on that rate cut in full to their variable home loan customers, but at various lengths. So for example NAB is cutting those rates from the 28th of February, Westpac from the 4th of March, the Commonwealth Bank and ANZ also on the 28th of February.
So for more on what it means for you and for your mortgage, along with your savings rates, because remember they will be impacted as well, I spoke with Sally Tindle, consumer insights director at Canstar. Assuming the banks pass it on to their customers, that rate reduction, do those borrowers get that automatically or do you need to ask your bank for it?
So if you're on a variable rate mortgage, your interest rate should automatically be reduced if your bank is passing it on in full, and it should happen within about two weeks of the announcement. However, your minimum monthly repayments and your direct debits may not automatically go down. Some banks will keep your monthly repayments at the exact same level unless you proactively reach out to them and ask them to lower them.
What are some tips for people still wanting to pay off their mortgage faster in a falling interest rate environment?
If you can possibly keep your monthly repayments the same level, it is worth considering, because any extra interest that you would have handed over to your bank can then go back into your mortgage as an extra repayment. It has the potential to save you thousands of dollars over the life of the loan. It could even see you be free of the shackles of the mortgage months, if not years, earlier.
What about savings rates?
They'll fall as a result too. The cash rate cuts are always a double-edged sword. Yes, one-third of households have a mortgage, but that means two-thirds of households across the country either have savings in the bank or would like to have savings in the bank. And for these people, this is a bad pill to swallow. Unfortunately, we will see savings rates drop on the back of this cash rate announcement today. There are still going to be likely a handful of rates out there that are above that 5% mark. It could be a good time to take your nest egg shopping for a competitive interest rate.
And finally, RBA rate cuts, do they apply to credit cards?
So banks and lenders don't tend to move credit card interest rates in line with the RBA. So if you were hoping for an interest rate cut on your credit card, unfortunately you'll need to think again. That all said, the average credit card interest rate at the moment is 18.5%, yet there is a decent handful of providers offering at least one credit card rate under 10%. The lowest is sitting at below 8%. You could get yourself the equivalent of 10 percentage points off your credit card interest rate just by shopping around.
That's Sally Tindle there from Canstar. We'll leave the rates coverage there just for a moment. We'll get market reaction soon, but first to one of the big profit results of the season, that's BHP. It did declare its lowest dividend in eight years amid a slowdown in Chinese steel demand. The company posting a 23% decline in underlying profit as some commodity prices remain under pressure, including its biggest earner and Australia's single largest export, iron ore. So what's BHP's future? Reena Bosch spoke with the company's CFO, Vandita Pant.
Vandita, thank you so much for jumping on for a chat. I do want to kick off by talking about your results specifically, BHP's dividend which came in at its lowest in eight years. What's your message to shareholders, especially those who are attracted to yield?
So my message is very clear that BHP is in great shape, both operationally and financially. Our volumes are up 5%, unit costs are down 4%. Western Australia iron ore business continues to be the leading iron ore business in the world. BMA in Queensland, production is up 14%, and copper has grown 10% this half, contributing almost 40% to EBITDA. What that has delivered is a net operating cash flow of more than 8 billion this half, which on a run rate basis is in line with more than $15 billion a year for all years bar one in the past 15 years. That stability is the hallmark of BHP and something that our investors really value. We have declared an interim dividend of 50 cents US per share, that's 79 cents Australian, and we are continuing to progress and mature and execute our organic options across copper, potash, and some growth in Vale. So a great set of results.
