RBA slashes interest rate to 3.75%
BusinessDay reporter Chris Zappone looks at the key factors influencing the Reserve Bank's decision to drop interest rates by 50 basis points.PT1M8S http://www.canberratimes.com.au/action/externalEmbeddedPlayer?id=d-1xw0b 620 349 May 1, 2012
Update The Reserve Bank has slashed interest rates by the most since the global financial crisis in a bid to reignite growth in the sagging economy. The dollar dived on the decision.
- What you'll save from the rate cut
- Malcolm Maiden: the RBA takes a risk
- Michael Pascoe: What's missing
- What the economists say
- Chronology of RBA decisions since 1990
- RBA's Glenn Stevens comments
- Home loan guide
The central bank today cut its official cash rate by 50 basis points - twice the amount expected by economists - to 3.75 per cent.
It smacks of a knee-jerk reaction to one round of inflation data
Today’s surprise reduction, the first by the RBA this year, is the biggest since February 2009 and reflects the bank’s concern that the economy needs an extra shot in the arm.
"Economic conditions have been somewhat weaker than expected" ... Reserve Bank Governor Glenn Stevens. Photo: Rob Homer
Attention will now shift to the commercial banks as borrowers - and depositors - wait to see how much the lenders cut interest rates, and how soon. ANZ customers, though, will probably have to wait until Friday, May 11, before they learn of the change.
The RBA indicated that the size of today's cut is needed in part because the central bank anticipates commercial lenders won't pass along the full reduction.
"A reduction of 50 basis points in the cash rate was, in this instance,...judged to be necessary in order to deliver the appropriate level of borrowing rates," RBA governor Glenn Stevens said in the statement accompanying today's move.
Currency strategist Derek Mumford said the 50 basis point cut "smacks a little bit of panic", particularly one week from the federal budget.
"It smacks of a knee-jerk reaction to one round of inflation data," said Mr Mumford, of Rochford Capital.
The RBA’s surprise move will come as a mixed blessing for Treasurer Wayne Swan as he puts the final touches to next week’s federal budget. While Mr Swan will welcome the cut and the potential for easing the financial squeeze for households with mortgages, the size of the reduction implies the economy is weaker than the central bank had predicted - which in turn means a smaller tax take for the government.
If passed on in full by the banks, a 50 basis-point cut will save about $96 a month for mortgage holders on a typical 25-year, $300,000 home loan.
The Bank of Queensland was the first bank to reveal its plans - passing on just 35 of the 50 basis-point cut.
The dollar immediately shed half a US cent to drop to about $US1.035 on the decision as the lower Australian interest rates cut its lure for investors. It fell even further in recent trading, to sink towards the $US1.03 mark.
"Our view is that they will deliver a rate cut in August," said Commonwealth Bank chief currency strategist Richard Grace. He tips the Australian dollar will slip below parity with the US dollar over the next few weeks.
Two among many
Leading up to today's decision, only two economists, Market Economics' Stephen Koukoulas and Citi's Josh Williamson, predicted the 50 basis-point cut.
"For the very pragmatic RBA, the growth numbers in March and inflation number in April were a genuine surprise to them," said Mr Koukoulas.
The economy expanded only 0.4 per cent in the December quarter - well below expectations.
"The RBA said: Let's play catch up and do the 25 basis-point cut we could have arguably done in March and give 50 basis points in cuts knowing the banks probably won't pass it all along," said Mr Koukoulas.
He believes there won't be another rate cut in June but there could be another 25 basis point later in the year, depending on the economy's strength and overseas sentiment.
Citi's Mr Williamson, though, reckons the RBA will stay put for a while.
"I think the RBA is now done for this cycle," Mr Williamson said. "The statement was very squarely neutral and by providing a 50 basis point-cut, they are actually playing catch up."
Investors, meanwhile, are rating the likelihood of a further RBA rate cut in June as a two-in-three chance, with two more cuts being priced in by the end of 2012. Yields on Australian government five- and 10-years bonds fell to record lows.
Swan claims credit
The series of RBA rate cuts was made possible by the government's fiscal displine, Mr Swan told a media briefing.
‘‘Today’s interest rate cut and the two before have been made possible by disciplined fiscal policy delivered by this government,’’ the Treasurer said. ‘‘A responsible approach to the budget and disciplined fiscal policy is very important given the economic circumstances in which Australia finds itself and given global uncertainty.’’
Returning the budget to surplus "ensures that the government is not generating price pressures in the economy," Mr Swan Swan said. ‘‘It does give the Reserve Bank of Australia the maximum flexibility to cut interest rates if they think that is appropriate.’’
Mr Swan reiterated recent calls made by politicans from both sides for the banks to match the RBA.
‘‘Their customers will be very, very angry with them if they do not pass through this rate cut,’’ the treasurer said.
‘‘If Australians are unhappy with the approach of their bank in these circumstances, they should walk down the road and get a better deal.’’
Bank results over the next week will probably add to pressure for them to pass on the full rate cut. The ANZ reports half-year results tomorrow, with Westpac to follow on Thursday and NAB next week. Including Commonwealth Bank's results reported in February, the big four banks are likely to post a combined $12 billion in profit for the half year.
Bank of America Merrill Lynch Australia chief economist Saul Eslake said the RBA noted the damaging impact of the strong dollar on the local economy and the need for lower official rates to make room for lower commercial lending rates.
‘‘In making the decision, the RBA has explicity acknowledged the dampening impact on growth by the strong dollar,’’ said Mr Eslake.
The RBA governor Glenn Stevens said in accompanying statement said: ‘‘Output growth was affected in part by temporary factors, but also by the persistently high exchange rate.’’
Based on the rate cut today, Mr Eslake said it was difficult to see more rate cuts in the months ahead.
HSBC Bank Australia economist Paul Bloxham said the RBA had a free hand with inflation under control for now.
"The statement notes that the ‘accretion of evidence over recent months’ had motivated the step down, suggesting they may have felt a bit behind the curve."
"The 50 basis-point cut also accounts for the fact that the RBA clearly does not expect it all to be passed through to lending rates," he said.
Today’s cut leaves the RBA’s cash rate at its lowest since December 2009 when the economy was recovering from the initial impact of the GFC. The RBA raised rates seven times from October 2009 before changing course last November with the first of two cuts to round out 2011.
The central bank last month signalled that it was poised to cut interest rates at its May meeting provided first quarter inflation figures were benign. In fact, by the RBA’s own core inflation measure, prices in the March quarter rose 2.15 per cent, the slowest annual pace since the final three months of 2000.
“Low first-quarter inflation cemented the decision to cut rates again in May, while weak conditions outside of mining led the RBA to deliver a bigger-than-expected 50 basis points,” said Moody’s Economy.com analyst Katrina Ell.
The RBA received the latest proof of a slowing economy today, with manufacturing slumping to its weakest in seven months while two surveys of home prices pointed to a broadbased retreat in most capital city markets.
Still, Australia's economy remains one of the strongest among rich nations - as reflected in the country's relatively high interest rates even after today's cut.
The 3.75 per cent rate compares with the official New Zealand central bank rate of 2.5 per cent, while the US fed funds rate is just a tenth of that, at 0.25 per cent. The European Central Bank rate is 1 per cent, the Bank of England's rate is 0.5 per cent and Canada's is 1 per cent.
With Madeleine Heffernan, and Reuters, AAP