The ASX surged and the Aussie dollar plunged after the Reserve Bank cut the cash rate to a record low of 1.75% yesterday in a bid to halt rising price disinflationary pressures triggering a bout of actual deflation.
The 1.75% is the lowest ever, lower even than the rate during the last recession almost 26 years ago.
The cut, the first in a year, came six days after the March quarter Consumer Price Index revealed a shock drop in headline into negative territory, and a fall in core inflation to 1.55%, half the top of the bank’s 2% to 3% target band “over time”.
The ASX 200 surged 50 points in a matter of minutes, while the Aussie dollar ended a brief stay above 77 US cents, falling 1.2 cents in a minute or so to 75.89 US cents. It fell further in offshore trading to around 75.20 US cents.
In fact the ASX 200 hit a high for 2016. The index jumped 111 points, or 2.1% to 5354, on the way setting a new 2016 high and finally finishing above where it ended 2015, and at a six month high.
The yield on Australian government 10-year bonds eased 5.6 basis points to 2.465%.
The National Australia Bank, the only one of the big four banks to forecast the cut, immediately announced it would pass on the cut to borrowers in full. The NAB’s statement came less than a day before the bank releases its half year profit. The NAB cut rates for both owner occupiers and investors.
The Bank of Queensland also cut its lending rate by the full 0.25%, around a month after increasing them by 0.12% for owner occupiers and 0.25% for investors.
Last night the Commonwealth and Westpac cut their owner occupier, investor and standard variable business rates by the full amount as well. But the ANZ only passed on 0.19% on all its home loan rates, including for investors. The bank cut its business rates by 0.25%.
It’s weak interim profit, ignored by investors for most of yesterday, needs the boost from keeping 6 basis points on billions of dollars of home loans.
Behind the RBA’s latest rate cut was deflation in the headline consumer price index, due mainly to falling oil prices, an 11% slide in fruit prices in the quarter, and aggressive retail price discounting. It was fall into negative territory since the depths of the GFC seven years.
Yesterday’s cut sees Australia join the likes of Japan, the European Union (Spain in particular) and parts of Scandinavia to report intensifying disinflation or deflation.
As well the likes of China has reported more than four years of falling producer prices in its huge manufacturing sector, the world’s most important.
Governor Glenn Stevens was at pains to claim that the rate cut would not boost housing to the point where it threatened the economy. He said conditions in the housing market had improved to “where indications are that the effects of supervisory measures are strengthening lending standards and that price pressures have tended to abate. At present, the potential risks of lower interest rates in this area are less than they were a year ago.” In other words the crackdown on the banks, especially their unchecked lending on investor housing – has helped bring home lending under control.
The statement yesterday concluded by saying it judged “that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting”.
And that was the key point of the statement – Mr Stevens doesn’t think the impact on housing and other activities outweighs the need to boost inflation back to ‘normal’ by trying to short circuit the emergence of the intensifying disinflationary pressures we saw in the March quarter. Halting that is the number one priority.
Meanwhile, Bureau of Statistics data showed a second rise in building approvals in March, but the annual trend is still trending lower. Building approvals rose 3.7% from February, in March, compared to market forecasts for a 2% fall.
Approvals had risen 2.9% in February, a reading revised down slightly from a 3.1% rise first reported.
Year-on-year, approvals fell 6.5%, better than the 14% forecast and slower than the 7.2% slide reported in February. But it is still the fifth month of falls, seasonally adjusted.
Approvals for private sector houses rose 2.6% in the month, and the ‘other dwellings’ category, which includes apartment blocks and townhouses, was up 6.7%.
