The Reserve Bank has cut interest rates for the first time in more than 2½ years, bringing relief to households and corporate borrowers.
As widely tipped by economists, the central bank today lowered its key cash rate by 25 basis points to 4.5 per cent. The move reversed the increase imposed on Melbourne Cup Day last year, the most recent time the RBA has shifted rates.
Westpac has moved to match the RBA, cutting its standard variable rate by 25 basis points to 7.61 per cent, effective from November 14. Fellow big four bank Commonwealth Bank also lowered rates on a series of variable home packages by 25 basis points, trimming them to between 7.66 per cent and 6.86 per cent, depending on the product, effective from Friday.
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Bank of Queensland and ME Bank have also joined in, with similar rate reductions. The ANZ and NAB may announce their rate changes by this evening.
If passed on in full by commercial banks, today’s rate cut will trim mortgage repayments on a typical 25-year, $300,000 home loan by $46 a month.
The banks, meanwhile, are flush with funds. NAB last week reported record full-year cash profit of $5.5 billion and Westpac is also tipped to report record results tomorrow, with analysts expected cash earnings of about $6.3 billion for the year.
More to come?
Westpac’s chief economist Bill Evans was among the first economists to predict the RBA would shift from raising rates to cutting them. He continues to predict the central bank will lop 100 basis points over the cycle, trimming them to 3.75 per cent.
”We continue to expect that the next cut will come in February after the Bank gets further evidence on inflation and has time to assess the impact of this move,” Mr Evans said.
He noted that the RBA today described 4.5 per cent rate as “more neutral” rather than “neutral”.
“Consistent with previous statements the Governor correctly continues to describe overall financial conditions as tighter than normal, recognising weak credit growth and falling house prices,” he said. “There is also a much less upbeat description of the external sector.”
“China is now described as having slowed, commodity prices are now recognised as having ‘generally declined’ and global trade is now recognised as being affected by the slowdown in Europe,” Mr Evans said.
“In recognising that the policy stance may still be in the contractionary zone the Bank has increased the prospects that further cuts can be expected,” he said.
Other economists held different views.
“There are no hints in the statement that the RBA is considering further moves at this time,” said HSBC chief economist Paul Bloxham. “In large part it seems to be characterised as a shift back to ‘neutral’ given that the inflation concerns that the RBA had previously seemed to have dissipated.
“The RBA has inflation where they’d like it such that they can cut rates if the global economy needs it,” said Mr Bloxham.
Michael Workman, senior economist at Commonwealth Bank, said it was too early to rule out the possibility of more cuts, especially if overseas problems re-emerge.
“I wouldn’t depict this as a one-off move. They’re saying, in their reading of it, that it could be some time before all these concerns about the European situation can be finalised and they believe that, in the meantime, there could be a period of more conservative spending behaviour by firms and households,” Mr Workman said.
“It looks like we’ll just have to see the way that pans out. Obviously, in their judgment, they still see these downside risks as quite apparent to the global economy and therefore would influence issues here negatively.”
Prime Minister Julia Gillard repeated calls made earlier today by her ministers that the banks should fall in line with the RBA.
“I believe Australian banks should pass on this interest rate cut in full,” Ms Gillard told Parliament.
“Despite our strong economic fundamentals, and they are strong, parts of the community are doing it very tough, are finding it very hard to make the family accounts add up, to get the bills paid,” she said.
She said the central bank’s decision also reflected the patchy performance of the economy that the government had been talking about for many months.
“When you have a patchwork economy with resources screaming ahead, and as a result the Australian dollar at high levels historically … it does put pressure on other sectors of the economy that are trade exposed, including manufacturing,” she said.
The Australian dollar, meanwhile, dropped on the RBA decision, losing about three-quarters of a US cent to trade recently about $US1.046.
Share prices edged lower after the announcement, with banks down between 1 and 2 per cent. Retailers were also down even though lower borrowing costs will help free up funds for many households.
Australia’s interest rates remain among the highest among rich nations. New Zealand’s cash rate, for instance, is 2.5 per cent, while the US Fed’s funds target rate is 0.25 per cent. Europe’s refinance rate stands at 1.5 per cent, while Britain’s bank rate is 0.5 per cent and Japan’s just 0.1 per cent.
RBA governor Glenn Stevens noted that recent sharp moves on financial markets were likely to act as a drag on Australia’s economy.
“The effects of the recent turmoil on confidence may result in a period of precautionary behaviour by firms and households,” he said in a statement accompanying today’s decision.
Employment conditions at home have softened and inflation figures have been moderate, giving the RBA room for today’s rate cut, Mr Stevens said.
“Over the past year, the board has maintained a mildly restrictive stance of monetary policy, in view of its concerns about inflation,” he said. “With overall growth moderate, inflation now likely to be close to target and confidence subdued outside the resources sector, the board concluded that a more neutral stance of monetary policy would now be consistent with achieving sustainable growth and 2-3 per cent inflation over time.”
Since August, financial markets have plunged then rebounded as fears about a default on sovereign debts by Greece or other European nations flared then fizzled. A deal hammered out by European Union leaders included writedowns of 50 per cent for holders of Greek debt, and the creation a 1-trillion euro ($1.3 trillion) rescue fund helped calm those concerns for now.
Still, markets remain sensitive to the prospects of other countries falling into similar troubles as Greece, with Italy and Spain among the leading contenders. Those worries mean the RBA’s job in easing interest rates to bolster local confidence may not be done, analysts said.
“Whilst the bank acknowledged the recently improvement in global financial markets, the bank warns that it is likely to be some time yet before concerns about the European situation can definitively be laid to rest,” said 4Cast Ltd analyst Celeste Tay. “The bank appears slightly concerned about the knock-on effects that this will have on sentiment, especially through the wealth channels.
“As such, we see part of the reason behind today’s cut was to deliver an added boost to confidence,” she said.
Retailers, which have struggled as consumers have pared local spending in favour of overseas travel and shopping this year, cheered the decision coming ahead of the crucial Christmas shopping season.
“Retail in Australia needs this boost, particularly going into Christmas 2011, a vital holiday period for the sector,” said Australian National Retailers Association chief Margy Osmond.
“After a year where retail figures have hovered around a third of the usual growth rate, despite no movement on interest rates for the past 12 months, retailers have been crying out for some assistance from the central bank.”
The housing sector will also applaud today’s move. Figures out today showed house prices in the September quarter fell the most since the global financial crisis, while new home sales had their worst month in 10 years.
Countering those areas of weakness is the ongoing mining boom, with investments in the pipeline worth an estimated $430 billion.
The RBA noted that recent falls in commodity prices meant that Australia’s terms of trade – the relative prices of our exports versus import costs – have now peaked. While they will “decline somewhat in the near term”, the RBA noted, they “remain very high.”
The Reserve Bank had stoked expectations of a rate cut with officials in recent weeks saying they had room to move if needed to bolster the economy, particularly if inflation figures remained subdued.
Last week, core inflation data – the measure watched by the RBA – slowed to 0.3 per cent in the September quarter, the weakest pace in 14 years.
Financial markets were earlier today pricing in four cuts of today’s size over the next 12 months, with three more now to come. That estimate remains little changed after the verdict, with another 90 basis points in cuts now expected over the year.
A survey by Bloomberg found 16 of 27 economists had tipped the bank would slice rates by 25 basis points.
Article originally appeared in The Sydney Morning Herald