Big rate cut but will it all reach borrowers?
Reports say borrowers may only see two-thirds of the RBA rate cut, and Christopher Pyne gets embroiled in Ashby-Slipper scandal.PT3M44S http://www.canberratimes.com.au/action/externalEmbeddedPlayer?id=d-1xxwl 620 349 May 2, 2012
IF YOU are a borrower, don't be too cock-a-hoop that the Reserve Bank has cut its official rate by half a percentage point rather than the usual quarter. This just increases the scope for the banks to take a big bite before they pass what's left on to you.
But this won't comfort the silent majority - the greater number of people who lend to banks rather than borrowing from them. These people can expect to receive significantly lower interest rates on their term deposits, at a time when the sharemarket has been performing poorly.
The unexpectedly big cut is the closest we will come to an admission that, for months, the Reserve has overestimated the economy's strength.
The unexpectedly big cut is the closest we will come to an admission that, for months, the Reserve has overestimated the economy's strength and underestimated the dampening effect of the high dollar on manufacturing, tourism and other export and import-competing industries.
People who lend to the bank, such as retirees and those who save, will feel the pinch of the Reserve Bank's latest cut.
It may provide a little comfort to the becalmed retailers, though their problems relate more to the end of Australian households' three-decade borrowing binge, the growth in internet sales and consumers' continuing switch from goods to services.
This country abounds with people who think they could do a much better job of managing the nation's economy than the Reserve Bank does, and are never afraid to say so. The media are always happy to broadcast their criticisms.
These professional lobbyists and amateur second-guessers have just had an almighty win. People whose job is to perpetually cry poor on behalf of their clients - who would go on demanding rate cuts for as long as rates remained above zero - will be crowing for a week.
They will be back on the (well-remunerated) job in no time, much emboldened.
And now that the Reserve has broken its precedent - at a time that hardly ranks as an emergency - we can expect to be playing the will-they-do-a-quarter-or-a-half game every time another rate cut is mooted.
One reason the Reserve has hitherto been reluctant to move in steps of more than a quarter is its reluctance to be seen as having panicked. But this, apparently, is a price the Reserve's governor, Glenn Stevens, is prepared to pay.
One thing to be said is that he doesn't let his ego stand in the way of what he sees as his duty.
Some people have taken the surprise move as a bad sign for the Gillard government: the economy won't be growing as fast as needed to help get its budget back to surplus next financial year.
But I think it works the other way round: the Reserve is giving interest rates a big cut now to increase the likelihood the economy will be growing reasonably strongly in 2012-13.
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