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Has anti-carbon tax sentiment cut confidence?

Exploring the public's "mode of no-confidence", which may be partly to blame for rate cuts, and the rest of today's political news with Tim Lester.

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THE Reserve Bank is worried that Australians are unreasonably pessimistic about the economy, and it believes the campaign against the carbon tax is to blame.

In a bid to stimulate the economy, the Reserve has cut its cash rate by 0.25 of a percentage point. The cut was in part a response to a slowdown in China and turmoil on financial markets spooked by the European economic crisis.

But also central to the decision was a concern that no matter how good the domestic economic news, Australians are scarcely noticing in an atmosphere muddied by campaigning against the carbon tax.

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In the unlikely event that the banks passed on the rate cut in full, it would slice $48 off the monthly cost of servicing a $300,000 mortgage.

The Bank of Queensland was the first to move, cutting its variable home rate by 0.20 of a percentage point.

But the four big banks had not responded by last night. Australia Institute researcher David Richardson said each day they delayed added $6.2 million to their collective profits.

The difference between the official cash rate and standard variable loan rates has now blown out to the widest level since banks began shifting rates independently of the Reserve four years ago.

Analysis by The Age shows the big banks have widened their margins on average home loans by as much as 1.45 percentage points in the four years.

In total, banks have passed on less than half of the 2.5 percentage points of official rate cuts since the start of the global crisis. This represents an additional $269.50 per month that is being paid on an average $300,000 mortgage.

Regardless of how much of the latest cut is passed on by banks, the Reserve is understood to be concerned that its attempts to stimulate the economy are being compromised by lobbying against the carbon tax, which is also obscuring the benefits of the July 1 income tax cuts.

When the Reserve cut rates by 0.50 of a percentage point in May, the Melbourne Institute consumer confidence index barely moved, and assessments on whether it was a good time to buy a major household item went backwards.

The Reserve governor's statement released after yesterday's rate cut said that despite modest economic growth and low unemployment, Australians continued to ''exhibit a degree of precautionary behaviour''.

If confidence does not lift and the global financial situation gets worse, the Reserve will cut rates again. It believes the very low official inflation rate gives it room to do so.

Treasurer Wayne Swan raised the possibility of more cuts, saying the Reserve had ''further room to move''. He appealed for Australians to become more confident, saying the economy was strong compared with the rest of the world.

''I know that as Australians watch these events unfold overseas they get the impression that all of these things are happening in their back yard and perhaps in their economy, but our economy remains strong,'' Mr Swan said.

Shadow treasurer Joe Hockey said the central bank had cut rates to ''near emergency levels''. The Reserve cash rate stands at 3.50 per cent, just half a percentage point above the low of 3 per cent reached during the global financial crisis.

But mortgage rates are nowhere near as low. During the crisis, standard variable mortgage rates slid to 5.75 per cent. Ahead of yesterday's Reserve cut, they stood at 7.05 per cent.

Last month, most lenders withheld about a quarter of the RBA's double-sized rate cut, citing the need to cover their own rising borrowing costs. Bank executives have recently blamed intense competition for deposits in Australia as a key reason for partly withholding rate cuts.

When reporting their recent profit results, each of the big banks said their margins had been squeezed as they attempted to balance rate cuts with funding costs.

Official advice provided to the Treasurer says the big banks can afford to pass on the latest cut in full. But the Reserve noted yesterday that international turmoil is pushing up bank funding costs again.

ANZ will announce its decision on Friday. National Australia Bank said it stood by its commitment to offer the lowest rate of the big four.

The Australian dollar jumped more than US1¢ yesterday after the Reserve resisted a larger 0.50 percentage point rate cut.

Futures traders assigned an 80 per cent probability to a cut of 0.50 when the Reserve board next meets on July 3.

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