Why we can't expect more rate cuts + How to boost your borrowing power

Hi everyone,

At last. A rate cut. It is welcome relief for so many Australian households fighting the cost-of-living crisis.

But the Reserve Bank is warning they cut reluctantly and not to expect too many more.

A lot to talk about, so let’s get straight into it.

In this newsletter:

• Don’t expect too many more quick rate cuts.

• What are the savings from a rate cut and how to make sure you’re on the best rate.

• How your borrowing power improves from a rate cut - the good and the bad news.

• The impact of a rate cut on property values.

• Unemployment is up, even though job creation is strong.

• Wage rises under control.

• 9 essential money tips to teach your kids.

• Trump and politics of trade.

Reserve Bank Governor slaps down economic forecasters

The 0.25 per cent official interest rate cut was expected and deserved. Australian households have done their bit to fight inflation (if only federal and state governments would follow the same lead) and earned the first rate reduction since November 2020. Rates have stayed at this 13-year-high level since November 2023.

But enjoy it while you can because the RBA Governor, Michele Bullock, isn’t convinced there will be too many more cuts to come. This was the big surprise from Tuesday’s announcement - not the decision itself, but what the RBA said about it.

Firstly, the financial markets felt a cut was certain. But the Governor said the issue was hotly debated amongst the RBA board on whether to hold again or cut. In their eyes it was no certainty.

“In the December quarter underlying inflation was 3.2 per cent, which suggests inflationary pressures are easing a little more quickly than expected. There has also been continued subdued growth in private demand and wage pressures have eased. These factors give the Board more confidence that inflation is moving sustainably towards the midpoint of the 2-3 per cent target range,” the rate-setting Board said.

“If monetary policy is eased too much too soon, disinflation could stall, and inflation would settle above the midpoint of the target range.”

“In removing a little of the policy restrictiveness in its decision today, the Board acknowledges that progress has been made but is cautious about the outlook.”

"While today’s policy decision recognises the welcome progress on inflation, the Board remains cautious on prospects for further policy easing."

Secondly, Bullock took aim at all the economists predicting a stampede of rate cuts between now and the end of the year. Some are predicting another four 0.25 per cent cuts this calendar year. Basically, Bullock told them, at this stage, that they’re dreaming.

“Today’s decision does not imply that further rate cuts along the lines suggested by the market are coming. It was a difficult decision in the sense there’s arguments on both sides.”

So, the message from Michele Bullock is pretty clear. The rate cut is deserved as inflation has been heading back to within the RBA target range. But the unknown is just how much it will stimulate the economy and keep the jobs market tight. If the March quarter CPI came in at about 0.7 per cent and unemployment rose to 4.2 per cent, or above, then another rate cut is likely. But I reckon it depends on those two factors.

Then there’s the Trump factor. Financial markets, and the RBA, hate uncertainty, and Trump is such a loose economic canon that no one really knows what he’s going to do next.

If there’s a global tariff war it pushes up prices and fuels inflation and interest rates may need to go up again. That’s what the RBA is concerned about.

What does this week’s rate cut mean for borrowers?

The 0.25 per cent cut to interest rates could leave an extra $100 a month in the pockets of mortgage holders. And most lenders have already indicated they’ll pass on the full cut to borrowers.

Monthly repayments on an average $642,000 loan with a variable interest rate of 6.3 per cent will be cut by as much as $104, or around $1,248 over the course of the year. The exact reduction would depend on the size of the loan, if the lender passes on the potential rate cut and the current interest rate.

But don’t forget you can negotiate an even bigger rate cut by checking whether you’re on a competitive home loan interest rate or not.

A lot of people think they’re trapped with their lender, but this isn’t the case. There are options out there and you’ll notice that even if your bank doesn’t directly lower your rates, they’ll be offering cheaper deals out there to new customers. This tells me that banks can and should be offering lower rates to their existing customers, but sadly, they’ve been getting away with slugging a loyalty tax for too long. It’s price gouging at its finest.

There are three steps to take before attempting a negotiation with the banks:

Step 1 - Before you ask for a lower rate, arm yourself with information. You should know your lender’s lowest advertised rate.

Step 2 - Next shop around and see what other offers are available. You might find even cheaper rates or enticing incentives like cashbacks.

Step 3 - Finally, use a calculator to work out what you could be saving. Knowing the money you could be clawing back is great motivation. You should feel empowered to negotiate.

The worst thing that can happen is that your bank will tell you ‘no’ and then you’re free to move on to a different lender.

Compare the Market analysis conducted in February found a whopping 1.4 per cent difference between the highest (7.24 per cent) and lowest (5.84 per cent) advertised rates for some variable loans. That’s the equivalent of almost six 0.25 per cent RBA rate cuts

Refinancing may save you thousands of dollars over the life of your loan but look out for the following when refinancing:

Fees - Ask the new lender to waive upfront fees.

Break costs - If you refinance from a fixed-rate loan before the fixed term is up, you could incur significant break costs.

Cashback deals - The allure of cold hard cash can be tempting but also consider the interest rate being offered.

Avoid an ugly revert rate - Fixed rate loans usually revert to a standard variable interest rate after a pre-determined amount of time, which is often much higher than the market average variable rate.

The rate cut will also boost borrowing power

While rate cuts will improve borrowing power, be warned they won’t necessarily bring homeownership dreams closer in reach. Rather than helping people reach their property goals faster, they may just end up paying more as a result, as bigger deposits threaten to push up property prices.

I really encourage people to run a mortgage stress test before making use of their improved borrowing capacity. If you max out on your loan, you could find yourself in a difficult situation, should your circumstances change down the track. Your debt-to-income ratio is an important consideration, not only for banks to assess your capacity, but for you to understand to ensure you have enough money to live on while paying off the mortgage.

Generally, a good rule of thumb is to ensure you’re not spending much more than a third of your income on repayments. You want to ensure you’ve got plenty left over for your other bills and expenses, and some to put aside for saving and emergencies.

Tips for boosting borrowing power

Here are some steps to take to enhance your borrowing capacity:

• Reduce your credit card limits or get rid of them. When lenders calculate borrowing power, they use the entire credit card limit, rather than the balance, as part of their serviceability calculations. Therefore, reducing your limit or closing your credit card may help boost your borrowing power. According to a Compare the Market analysis, a $10,000 credit card limit held by someone earning $100,000 would reduce their borrowing capacity from $552,000 to $505,000.- a difference of $47,000.

• Know your credit score. Websites like Compare the Market provide free credit score checks to help you understand how strong your borrowing position is. Lenders use your credit score and credit history to calculate risk when assessing your application. Improving your credit score is one way to improve your chances of being approved.

• Consider a joint purchase. You could team up with a family member, partner or friend if your borrowing capacity isn’t high enough and you’re struggling to meet the lender’s income requirements. Joint purchases have become a popular way for many to break into the property market. Two incomes are usually better than one, so you may find your borrowing power increases with an additional person on the loan.

The impact of the rate cut on property values

At the end of last year I revealed the likely scenarios for the property market in 2025 from Louis Christopher’s Boom and Bust Report. I rate the boss of SQM Research as one of the best property minds in the country and I always look forward to his annual report.

After this week’s RBA rate cut, one of the Boom and Bust report’s four scenarios for 2025 now looks more likely. As you can see, the March quarter rate cut according to Louis’ prediction is likely to turn around the property fortunes in Melbourne and Sydney from a negative return in 2025 to positive.

Unemployment up even though big job creation

The RBA Governor has made jobs and wage growth a key factor in any further rate cuts. Yesterday we received a temperature check on the job market …

Employment growth outpaced market forecasts for a second successive month in January as more females gained work, yet the unemployment rate ticked up as an unusually large number of people were waiting to start a new job at the beginning of 2025.

The Aussie economy added a solid 44,000 jobs in January, well above market forecasts for a 20,000 rise, and the tenth consecutive monthly gain in employment. Female employment jumped by 44,100 last month with male employment down by just 100 positions.

Just over 345,500 permanent jobs were added to the economy in the 12 months to January 2025, with part-time jobs up 152,900 over the same period. Overall, the Aussie economy has created a whopping 498,400 jobs over the past year, the strongest annual pace since May 2023.

But despite this strong job creation the unemployment rate edged up to a three-month high of 4.11 per cent in January. The jobless rate is now 0.66 per cent above the 48-year low of 3.45 per cent in October 2022, but is still one of the lowest jobless rates in the OECD. The workforce participation rate rose to a fresh all-time high of 67.3 per cent in January with the female participation rate hitting a record high of 63.5 per cent. Male worker participation rose to 71.3 per cent.

If you’re in a job the chances of losing it are at record lows - the green line in this chart:

And where are most of the jobs being created? Healthcare. Compared with the rest of the world, Australia is hiring more healthcare workers than anywhere else.

Jobs are secure, but is this adding to wage inflation?

It seems like the answer is, surprisingly, no.

Australian wages rose at the slowest annual pace in more than two years in the December quarter, even as unemployment stayed near historic lows.

The Wage Price Index (WPI, excluding bonuses) rose by 0.65 per cent in the December quarter … the slowest quarterly pace since the March quarter of 2022.

Annual pay growth decelerated to 3.22 per cent in the December quarter ... the slowest annual wage growth since the September quarter of 2022 and the biggest wages slowdown for any calendar year since 2009.

9 essential money skills to teach kids

I know I talk about financial literacy a lot ... it’s something I’m really passionate about. But honestly, I can’t help but wonder how much financial strife could be avoided if people were given an education in this from a young age. It is such an essential life skill.

Teaching our kids basic money skills early on will not only give them the tools to build wealth, but more importantly, help them steer clear of financial pitfalls.

Here’s what I believe we should be teaching our kids now. Trust me, this will set them up for a financially secure life:

1. How to save and set goals

Saving and goal-setting are Money Management 101. Start by talking to your kids about their financial goals (saving for a toy when they’re little or a car when they’re older) and how they plan to reach them. Saving for savings sake is pretty boring, they need a goal.

For younger kids, a piggy bank works great, while older kids can use online equivalents like Spriggy and Bankaroo which also allow parents to manage pocket money and transfer funds from a ‘parent wallet’, but be mindful of fees. A bank account and debit card can also earn interest, which is a helpful bonus.

2. Saving before spending

In our Buy Now Pay Later culture, this is one we really need kids to get a grasp on early: Save your money first before spending it.

It’s a general money rule to live by to avoid debt, but also, to practice delayed gratification.

3. The power of compound Interest

Opening a savings account is a great way to introduce kids to how money can grow over time. Explain how interest works - that the longer they save, the more money they can earn with interest.

For little kids, you can play the "Compounding smarties game":

Give them 10 Smarties as their "money" and explain they’ll earn more over time. For example, after a minute, they get one more, bringing it to 11. The next minute, interest is paid on 11 Smarties (worth two Smarties), and so on. Keep going until someone eats their investment!

4. How to earn money

They may be too young for a part-time job but it’s never too early for kids to try to find creative ways to make money. Holding a street stall where they sell their old toys or having a lemonade stand, will help them to explore entrepreneurship, practice money-handling, and the concept of profit - what’s left after deducting the cost of making the product.

Other ways to earn money can be offering services like dog-walking, or by helping around the house. Link these jobs to pocket money.

With our four kids, they had ‘family jobs’ which are just part of life - make your bed, keep your room tidy etc. Then they had ‘pocket money jobs’ which helped Libby and I - unpack the dishwasher, fold the washing etc. We also stipulated that they could spend 50 per cent of their pocket money, had to save 40 per cent for an agreed goal (which we often matched dollar for dollar depending on the goal) and 10 per cent had to be donated to a charity of their choice to show them they need to care for their community.

Making money helps kids understand it is earned, not just given.

5. How to stick to a budget 

A budget is about more than just allocating money ... it’s about setting intentions and practicing self-restraint.

A fun way to teach this is by giving kids a small amount of money to spend at a discount store, with specific items to buy, like “something blue,” “something for school,” and “something for you.” They’ll need to stick to the budget and make smart choices to get everything without overspending.

6. Understanding how credit works

It’s crucial for kids to understand how credit works and what borrowing money really means.

For younger kids, play a reverse version of the Smarties game. This time. take away a Smartie every minute, showing them how debt can increase over time with interest.

For older kids, explain how credit cards work and why paying off debt on time is essential. If you like, you can share your own real-life stories or people they might know that demonstrate the dangers of bad credit, to help them understand its impact.

7. Being a good consumer

Becoming a savvy shopper can be one of the greatest financial gifts you can pass on to a child. But you need to lead by example.

At the supermarket show the difference in price between brand name and lesser known equivalent products and what you can do with the difference. Show them comparison websites like Compare the Market and how prices for big bills can vary so much. When buying clothes at a shop, ask the shop assistant “is that your best price” to show there is no harm in asking - they can only say no.

8. Recovering from financial mistakes

Our kids will one day make a bad money decision or two, but the key is helping them bounce back. If they spend their money impulsively or don’t save enough, help them learn from their mistakes and make better decisions in the future. Let them feel the pain of loss or being scammed so they can make better decisions in future.

9. Being wary of scams

Talking of scams, kids encounter these early in today’s digital world, especially in online gaming or through social media.

Teach them how to spot them!

• If it seems too good to be true, it probably is - no-one gives away free stuff without a catch.

• Don’t share personal info - this includes passwords, address or bank information - with online strangers.

• Look for red flags - unfamiliar numbers, poor grammar, or requests to "Act now!"

• Check before clicking - teach them to go directly to a website rather than trusting an email link.

• Encourage your kids to tell you if they get a suspicious message, offer or something just feels ‘off’.

By teaching these money-management skills, you're setting them up to feel confident, secure, and smart with their money for years to come.

Trade and political power

Donald Trump has made trade a political weapon as he has used the threat, and implementation, of increased tariffs to get his way in a whole series of decisions. He is using the trade muscle of the US to bring change.

But interestingly the US domination of global trade has been seriously eroded as China now dominates. Trump will need to be wary if China takes an equally aggressive trade strategy.

In the year 2000, US trade totalled $US2 trillion. More than four times China’s $US474 billion.

But between 2000 and 2024, US trade grew 167 per cent compared to China’s trade growing 1,200 per cent to surpass the US in 2012.

In 2024, China’s total global trade is $US6.2 trillion and ahead of the US $US5.3 trillion.