Rates set to travel south, but not too far

The rising chorus urging the Reserve Bank to cut interest rates by a half a percentage point tomorrow confronts a difficult historical note: the central bank in the past 10 years has only eased monetary policy by more than 25 basis points during the global financial crisis.

The owner of Coles and one of Australia's biggest employers, Wesfarmers, yesterday joined the Housing Industry of Australia, the Australian Retailers Association and some economists in calling on the Reserve to lower the official cash rate by 50 basis points, to 3.75 per cent, tomorrow.

Wesfarmers chief executive Richard Goyder said the economy was in ''reasonably good shape'' but weak consumer confidence and the strong Australian dollar were hurting some business sectors.

''A rate cut would be good in terms of getting positive consumer sentiment,'' he said yesterday on the ABC's Inside Business television program.

''The high dollar is having an impact on a number of businesses and indeed, I think it's one of the things that's impacting a number of our suppliers.

''So a rate cut, I think, would be helpful for a number of sectors of the economy and I hope it comes.''


Mr Goyder said a reduction in the magnitude of 0.50 of a percentage point would have a bigger impact but he doubted the central bank would ease monetary policy by that amount.

''I wouldn't bet my house on it,'' he said.

The Reserve said earlier this month it would consider lowering rates at its May meeting after reviewing the outlook for inflation. The March quarter consumer price index, released last week, showed a surprisingly sharp cooling in headline inflation to below the Reserve's 2-3 per cent target band.

Most economists expect the Reserve to cut rates by a quarter-point tomorrow, followed by another cut of the same size in June, while a couple of economists tip a half-point cut tomorrow.

The Reserve has not cut by more than 25 basis points since the 2008-09 global financial crisis, when the central bank slashed rates by a 100 basis points on three separate occasions - October 2008, December 2008 and February 2009 - and by 75 basis points in November 2008.

The last time the Reserve cut rates by half a percentage point in one swoop was in April 2001 and by the same amount in February 2001, after the economy contracted in the final quarter of 2000 by 0.5 per cent. A key issue is how much of any Reserve rate cut tomorrow will the major retail banks pass on to customers. ANZ was the only one of the big four banks to raise standard variable rates on home and small business loans by 6 basis points this month.

TD Securities' head of Asia-Pacific research, Annette Beacher, said because ANZ's rivals did not increase their variable lending rates earlier this month, ''it's more of a wildcard than usual''.

''Our technical assumption is that ANZ is more or less obliged to pass on the full 25 basis point cut, but the others pass on around 15 basis points of the cash rate cut,'' Ms Beacher said.

AMP Capital Investors chief economist Shane Oliver said a quarter-point reduction would probably result in the retail banks passing on 10 to 15 basis points in cuts to their customers.

This would take mortgage rates back to about where they were earlier this year. ''Which wouldn't be enough to have much of an economic impact,'' Dr Oliver said.