The Reserve Bank has cut interest rates for the first time in more than two and a half years, bringing relief to households and corporate borrowers.
As widely tipped by economists, the central bank today lowered its key cash rate by 25 basis points to 4.5 per cent. The move reversed the increased imposed on Melbourne Cup Day last year, the most recent time the RBA has shifted rates.View our home loan calculatorsChronology of RBA moves since 1990Statement by RBA's Glenn StevensWestpac kicks off bank response
Westpac has moved to match the RBA, cutting its standard variable rate by 25 basis points to 7.61 per cent, effective from November 14. Fellow big four bank, Commonwealth Bank, also lowered rates on a series of variable home packages by 25 basis points, trimming them to between 7.66 per cent to 6.86 per cent, depending on the product, effective from Friday.
Bank of Queensland, ME Bank have also joined in, with similar rate reductions.
If passed on in full by commercial banks, today’s rate cut will trim mortgage repayments on a typical 25-year, $300,000 home loan by $46 a month.
The Australian dollar, meanwhile, dropped on the RBA decision, losing about more than of a US cent to trade recently at about $US1.046. Share prices were little changed, with banks down between 1 and 2 per cent. Retailers were also lower even though lower borrowing costs will help free up funds for many households.
More to come?
Some economists say the moderate language used in the RBA's accompanying commentary suggest today's move may be a one-off by the central bank for now.
"There are no hints in the statement that the RBA is considering further moves at this time," said HSBC chief economist Paul Bloxham. "In large part it seems to be characterised as a shift back to 'neutral' given that the inflation concerns that the RBA had previously seemed to have dissipated." "The RBA has inflation where they'd like it such that they can cut rates if the global economy needs it," said Mr Bloxham.
Michael Workman, senior economist at Commonwealth Bank, said it's too early to rule out the possibility of more cuts, especially if overseas problems reignore."I wouldn't depict this as a one-off move. They're saying, in their reading of it, that it could be some time before all these concerns about the European situation can be finalised and they believe that in the meantime, there could be a period of more conservative spending behaviour by firms and households,' Mr Workman said. "It looks like we'll just have to see the way that pans out. Obviously, in their judgment they still see these downside risks as quite apparent to the global economy and therefore would influence issues here negatively."
Financial turmoil
RBA Governor Glenn Stevens noted that recent sharp moves on financial markets were likely to drag on Australia's economy. "The effects of the recent turmoil on confidence may result in a period of precautionary behaviour by firms and households," he said in a statement accompanying today's decision.
Employment conditions at home have softened and inflation figures have been moderate, giving the RBA room for today's rate cut, Mr Stevens said.
''Over the past year, the Board has maintained a mildly restrictive stance of monetary policy, in view of its concerns about inflation,'' he said. "With overall growth moderate, inflation now likely to be close to target and confidence subdued outside the resources sector, the Board concluded that a more neutral stance of monetary policy would now be consistent with achieving sustainable growth and 2–3 per cent inflation over time."
Europe debt
Since August, financial markets have plunged then rebounded as fears about a default on sovereign debts by Greece or other European nations flared then fizzled. A deal hammered out by European Union leaders included writedowns of 50 per cent for holders of Greek debt, and the creation a 1-trillion euro ($1.3 trillion) rescue fund held calm those concerns for now.
Still, markets remain sensitive to the prospects of other countries falling into similar troubles as Greece, with Italy and Spain among the leading contenders. Those worries mean the RBA's job in easing interest rates to bolster local confidence may not be done, analysts said.
"Whilst the Bank acknowledged the recently improvement in global financial markets, the Bank warns that 'it is likely to be some time yet before concerns about the European situation can definitively be laid to rest'," said 4Cast Ltd analyst Celeste Tay. "The Bank appears slightly concerned about the knock-on effects that this will have on sentiment, especially through the wealth channels." "As such, we see part of the reason behind today's cut was to deliver an added boost to confidence," she said. Retailers, which have struggled as consumers have pared local spending in favour of overseas travel and shopping this year, cheered the decision coming ahead of the crucial Christmas shopping season. “Retail in Australia needs this boost, particularly going into Christmas 2011, a vital holiday period for the sector," said Australian National Retailers Association chief Margy Osmond. "After a year where retail figures have hovered around a third of the usual growth rate, despite no movement on interest rates for the past 12 months, retailers have been crying out for some assistance from the central bank."
The housing sector will also applaud today's move. Figures out today showed house prices in the September quarter fell the most since the global financial crisis while new home sales had their worst month in 10 years.
Countering those areas of weakness is the ongoing mining boom, with investments in the pipeline worth an estimated $430 billion.
The RBA noted that recent falls in commodity prices meant that Australia's terms of trade - the relative prices of our exports versus import costs - have now peaked. While they will ''decline somewhat in the near terms,'' the RBA noted, they ''remain very high."
Bank watchWith Westpac, Commonwealth and other banks' move to equal the RBA, the pressure will be on the other big rivals - ANZ and NAB - to match or beat the cut.The Reserve Bank had stoked expectations of a rate cut with officials in recent weeks saying they had room to move if needed to bolster the economy, particularly if inflation figures remained subdued.Last week, core inflation data - the measure watched by the RBA - slowed to 0.3 per cent in the September quarter, the weakest pace in 14 years.
Financial markets were earlier today pricing in four cuts of today’s size over the next 12 months, with three more now to come. That estimate remains little changed after the verdict.
A survey by Bloomberg found 16 of 27 economists had tipped the bank would slice rates by 25 basis points.More soonczappone@fairfax.com.au with ReutersA rate cut equals about $46 less in monthly mortgage repayments on the average $300,000 loans carried over 25 years. Last week, core inflation data - the measure watched by the RBA - slowed to 0.3 per cent, the weakest pace in 14 years, giving the Reserve Board leeway to cut rates. Conditions in the local and global economy on the other hand continue to present a mixed case about the growth and inflation prospects the central bank monitors. Credit growth has slowed over the year but has shown signs of picking up recently. Retail sales and consumer confidence have been positive for two months running, while recent data from the US has shown improvements there. Closer to home, China’s expansion has sent out a few worrying signals about credit bubbles or weaker demand for Australian commodities. Yet the European debt crisis continues to dominate headlines with sentiment alternating between extreme fear and hope for a lasting resolution to the problems.