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Rate cut: the verdict

Buyers will welcome interest rate cuts but what about the economy? Andrew Wilson gives his view.

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AUSTRALIA'S big four banks are in an excellent position to pass on all of the latest 0.25 per cent interest rate cut, Reserve Bank calculations show.

Each of the big four sat on its hands on Tuesday rather than respond immediately as they once used to. However, the smaller Bank of Queensland passed on 0.20 points and ING Direct all 0.25 points.

Prime Minister Julia Gillard, Treasurer Wayne Swan and shadow treasurer Joe Hockey all implored the banks to pass on the cut in full, with Mr Hockey qualifying his appeal by saying that if they did not cut in full they should give customers a complete explanation.

Interest rates.

The Reserve Bank calculations show the banks to be in a better cost position than they were in October, when the Commonwealth, ANZ and National Australia banks passed on only 0.20 points of the 0.25-point cut and Westpac only 0.18 points.

Reserve Bank governor Glenn Stevens said in a statement released with the rates decision that Australian banks had "no difficulty accessing funding, including on an unsecured basis". Mr Swan said that while ING Direct had done the right thing by its customers, the other banks had not.

Ms Gillard said that with Christmas approaching the big four "should take into account that Australian families will be looking to them to pass the interest rate reduction on in full".

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Illustration: Ron Tandberg.

If fully passed on, the cut will slice a further $47 from the monthly cost of servicing a $300,000 mortgage, bringing the total saving since the cuts began last November to $270 a month.

The RBA board cut rates because of signs that the business investment outlook is weakening, not only in mining but also in the non-mining economy. It paid close attention to the National Australia Bank survey of business confidence, which showed business conditions at their weakest in three years.

The bank wants to strengthen other parts of the economy to take up the slack as the mining investment boom passes. If necessary, it will cut rates again in order to sustain economic growth, restrained only by its inflation target.

Late Tuesday, the futures market assigned a 67 per cent probability to a further cut of 0.25 points at the board's next meeting in February. The board does not believe it has cut rates to "emergency levels".

Mr Hockey said the Reserve Bank was "trying to catch a falling Australian economy''. It had "dropped rates to emergency levels, not because the economy is doing well but because it is facing huge challenges".

The cut from 3.25 per cent to 3 per cent brings the bank's cash rate to the low point reached at the trough of the 2009 global financial crisis. But unlike during the financial crisis, it has not been brought there by a series of unprecedented large cuts.

Unlike during the global financial crisis, the cuts have not been accompanied by a dramatic boost in government spending or by an unusually low Australian dollar, but by a near-record high dollar.

"Anybody who would go out there and describe rates now in the same context that they were at the height of the global financial crisis is simply unqualified for high office," Mr Swan said.

"We are having an attempt to sensationalise this rate cut, not just by the Liberal opposition but elements of the media. Anyone who can't welcome a cut as such good news for families and business is somebody who is being negative about everything."