The Reserve Bank cut its key cash rate by 0.25% to 3%, a move that could be seen as a bit of ‘tidying up’ but also responding to the mixed messages coming from the local and global economies.
The 3% cash rate was the lowest for nearly 50 years.
It will flow on to home loans and some other lending products, but the cuts may not be fully passed through by all lenders.
The Commonwealth Bank led the way with a cut of just 0.1%, keeping 0.15% of the cut for its profit margins.
But then the National Australia bank shocked with no pass on: it kept the full 0.25% cut for itself.
That left Westpac and ANZ wondering what to do and whether their rate cuts could be larger to steal a marketing march on the CBA and the NAB.
The CBA blamed its decision on the high costs it is continuing to face in raising money to support its on-going lending needs.
The NAB did likewise, but in reality is confirmation that for all their strength, our banks dominate the country’s economy and can do what they like now there’s no competition.
Shareholders won’t benefit: they have had their dividend income cut by 20% or more to save the banks more money.
It also cited the high rate of interest it is paying on its deposit accounts which have attracted huge sums of money from customers in a ”flight to quality” because of the global financial crisis.
It won’t be the last.
Small regional lenders like Bendigo and Adelaide are doing it tough at the moment and are being forced to fund much of their lending from high priced retail deposits.
But the reduction was a bit of a surprise: market economists had been divided on whether there would be one: futures market had firmed towards a cut in the last two days.
The statement appears to rule out further cuts in the short term. There was no mention of future meetings and it ended by saying:
"The stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead."
That’s unlike the March 3 meeting when the RBA sat pat and didn’t cut.
There was a clear reference to the next meeting (yesterday’s) when the situation would again be reviewed.
It’s now a month to month situation and we will be left with the usual surge of opinion and commentary ahead and after each monthly meeting.
It will be the flow of information about the state of the economy that will now drive further cuts, rather than worries about the stability of the economy.
We know it’s sliding, the policy questions are how fast and how deep?
Since the March meeting, the economy was shown to be slowing towards a recession with Ric Battellino, the Deputy Governor revealing a change in official forecast last week when he said GDP would fall in calendar 2009.
Unemployment has risen, retail sales fell in February and building approvals were boosted by a one off surge in the volatile home unit and townhouse sector.
The fall in retail sales had been expected in some quarters, the unemployment figures, especially the ANZ job ads index, is showing very sharp falls ahead.
Yesterday around 1100 jobs were cut: 700 at Rio Tinto, 280 in Tasmania at Caterpillar and around 130 in two states by mineral sands group, Iluka.
The RBA Governor, Glenn Stevens, explained the reasons behind the cut in this post meeting statement.
"The Australian economy is contracting, though by less than those of its trading partners.
"Capacity utilisation has fallen from its peak, and will decline further over the rest of the year.
"With demand for labour weakening, growth in labour costs will probably also fall.
"Hence inflation over the medium term is likely to be lower than it has been over the past two years. Demand for credit is weak overall, though credit for owner occupied housing is picking up.
"There has already been a major change in both monetary and fiscal policy in Australia.
"Market and mortgage rates are at very low levels by historical standards and business loan rates are below recent averages, reducing debt servicing burdens considerably.
"Nonetheless, the Board judged that there was scope for a further modest adjustment to the cash rate.
“The stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead."
"Recent information from abroad indicates that the contraction in the global economy continued during the first few months of this year, and most assessments of the near term outlook have been further marked down.
“Considerable economic policy stimulus is in train in most countries, the full effects of which are not yet discernible, but which should help contain the downturn over the rest of the year.
"There are tentative signs of stabilisation in several countries, including China, though it is too early yet to judge how durable these will prove to be.
"Conditions in global financial markets have continued to improve gradually, helped by progress towards a resolution of banking system difficulties in the United States and other major countries.
“Sentiment remains fragile, however, and the contraction in economic activity is affecting asset quality of financial institutions."
AMP Capital Investors economist, Robert Cuneen said:
The RBA Governor’s statement conceded that "The Australian economy is contracting".
Given that Australia’s capacity utilization and labour demand is falling while credit demand is "weak overall", the central bank is essentially conceding to the current powerful reality rather than its previous "quiet confidence&quo
