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It's too soon to crow at the Reserve's big surprise

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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.

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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.

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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54 comments

  • Fat lot of good it will do Julia, Australia doesn't take her phone calls anymore.

    Commenter
    SteveH.
    Date and time
    May 02, 2012, 7:31AM
    • Yeah, lets not only choose to be wilfully ignorant about the policies of the goverment and the opposition, but actually be smug about it. That'll teach democracy a lesson... *shakes angry fist*

      Commenter
      Dan
      Location
      Sydney
      Date and time
      May 02, 2012, 10:44AM
  • I thought the ANZ took a preemptive "bite" 3 weeks ago when they raised their interest rate.

    It certainly places them in a position to trump the others.

    Commenter
    J. Fraser
    Location
    Queensland
    Date and time
    May 02, 2012, 7:56AM
    • The reason the Reserve Bank cut by more than 0.25 is the big four banks. They no longer think they should be passing on the full drop in rates to those who are borrowing. Profit is king, who cares about the customer. Oh and the media will overlook the fact they will also pass on the full drop in rates to savings accounts.

      Commenter
      Ando
      Location
      Canberra
      Date and time
      May 02, 2012, 8:09AM
      • I do not expect the banks to reduce interest rates, but I do expect an further increase.

        Overall if the banks keep ignoring the RBA it puts pressure on the govt to return to legislating the banks as they did in the past.

        Commenter
        ccb
        Date and time
        May 02, 2012, 10:03AM
    • For the self funded retirees, it could be a disaster. These people did the right thing, put away as much as possible for their retirement, and now some are facing struggle st. There are millions of them, due to the huge baby boom after the Second World War, and boy, does their vote count. It certainly is a double edged sword for the govt.

      Commenter
      Annie
      Location
      Hunter NSW
      Date and time
      May 02, 2012, 8:35AM
      • I'm a self funded babyboomer retiree.While I keep a little bit of money in terms deposits to meet everyday income needs, the vast bulk of our SMSF is invested in the sharemarket. We are currently on track to return over 10% this financial year through conservative equity holdings. I'm very happy to see interest rates fall as it will help my kids to get homes of their own.

        Commenter
        equity investor
        Date and time
        May 02, 2012, 9:27AM
      • Then you are one of the lucky ones. Most are not, and they vote.

        Commenter
        annie
        Location
        hunter NSW
        Date and time
        May 02, 2012, 11:31AM
      • You're right Annie when you imply that Equity Investor is unusual - I'm much more used to the rank selfishness of the modern Australian community rather than seeing a comment in which the writer expresses the view that while it might not benefit themselves personally, they are happy that it benefits someone other than themselves. Particularly from baby boomers.

        And one would assume that EI votes as well, wouldn't one?

        Commenter
        The Redman
        Location
        Canberra
        Date and time
        May 02, 2012, 12:16PM
    • '...at a time when the sharemarket has been performing poorly.'
      Have you looked at the share market performance recently? It seems to be going gangbusters. And an interest rate cut can only help.

      Commenter
      equity investor
      Date and time
      May 02, 2012, 8:59AM

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