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RBA shocks with rate cut

By webmaster
0

It’s happened again. For the second consecutive year, the Reserve Bank of Australia (RBA) managed to upstage the race that stops a nation.


At its November Board meeting on Melbourne Cup Day, the RBA cut the official cash rate by 0.25 per cent to 4.5 per cent.

Benign inflationary growth, slow employment growth and poor consumer confidence all culminated in the first interest rate cut in more than two and a half years, a stark contrast to last year’s shock Melbourne Cup rate rise.

Without a doubt, the cut provided the nation with a reason to celebrate – regardless of where their horse came in.

While the move was a welcome result for home buyers and investors, it failed to surprise several economists who had tipped a Melbourne Cup Day rate reduction.

Westpac’s chief economist Bill Evans was among the first to predict that the Bank would shift from raising rates to cutting them. He maintains the RBA will chop 100 basis points over the next rate cycle, resulting in an official cash rate of 3.75 per cent.

“We continue to expect that the next cut will come in February after the Bank gets further evidence on inflation and has time to assess the impact of this move,” Mr Evans says, pointing to the RBA’s acknowledgement of tight financial conditions, weak credit growth and weak house prices.

The central bank is even less upbeat about the ‘resources boom’ now, he adds.

“China is now described as having slowed, commodity prices are now recognised as having ‘generally declined’ and global trade is now recognised as being affected by the slowdown in Europe.

“In recognising that the policy stance may still be in the contractionary zone, the Bank has increased the prospects that further cuts can be expected.”

If the RBA does go on to cut rates further, it will be interesting to see what the banks do.

So far this month, three of the four majors have passed on the 0.25 per cent rate reduction in full to borrowers. ANZ, Westpac and CBA now offer standard variable rates of 7.55, 7.61 and 7.56 per cent respectively.

National Australia Bank, however, passed on a smaller 0.20 per cent rate cut to borrowers. Nevertheless, NAB still has the lowest standard variable rate of all the majors, at just 7.47 per cent – significantly less than its closest competitor, ANZ.

But while the banks were all happy to pass on some, if not all of the rate cut, it will be interesting to see what they choose to do if the RBA decides to cut rates again.

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