Wednesday 20 June 2018

Australia cenbank surprises with half point rate cut

Sydney, May 1, 2012

Australia's central bank cut its main cash rate by a surprisingly aggressive half a point on Tuesday and said inflation would likely be lower than expected for the next two years, leaving the door ajar for further easing if needed. 

The local dollar fell half a cent and government bond yields hit 60-year lows as the Reserve Bank of Australia (RBA) cut rates to 3.75 per cent, a level not seen since late 2009. Markets had only looked for a quarter point easing.     

"In considering the appropriate size of adjustment to the cash rate at today's meeting, the Board judged it desirable that financial conditions now be easier than those which had prevailed in December," RBA Governor Glenn Stevens said in a brief statement after the bank's monthly policy meeting.

"A reduction of 50 basis points in the cash rate was, in this instance, therefore judged to be necessary in order to deliver the appropriate level of borrowing rates." 

Some easing had been widely expected given a background of benign inflation and disappointing economic growth. In a Reuters poll of 22 analysts, 21 had expected a move of 25 basis points, with another cut for June.      

Rates are now the lowest since December 2009, but still far above those in the United States, Japan and Europe.  And that's one reason investors are pricing in a further 69 basis points of cuts within a year.

If they are right, that would see rates return to the record lows of 3 per cent plumbed during the depths of the global financial crisis.     

Any easing would be warmly welcomed by a Labour government that is trailing badly in opinion polls yet is set to deliver a tough budget next week aimed at returning to surplus years before most other developed economies.     

Australian households are highly sensitive to mortgage rates as over a third have home loans, most of which are variable.

Mortgage debt totals around A$1.2 trillion, or 1.5 times household disposable income, and paying the annual interest on it takes almost a tenth of those earnings.     

A reduction of 50 basis points in the standard variable mortgage rates saves an average borrower around $1,080 a year.     

Australia's banks are expected to only pass on some of this easing to their customers, choosing instead to maintain profit margins in the face of higher funding costs.     

The RBA has been on hold since cutting rates last November and December, but recently adopted an easing bias as growth in the $1.4 trillion economy disappointed outside the booming mining sector.     

A strong currency and intense foreign competition has pressured manufacturing and tourism, while a shift in spending habits by penny-pinching consumers has hit retailers hard.     

One result has been a sharp slowdown in employment growth, though the jobless rate remains historically low at 5.2 per cent.     

Housing has been particularly weak with the government's measure of city house prices falling 1.1 per cent in the first quarter, twice the drop forecast. Prices were down 4.5 per cent on the same quarter last year, a far cry from the heady growth pace of 19 per cent seen as recently as 2010.      

Still, the lofty local dollar has also helped restrain inflation by driving down prices for a whole raft of imported goods, from cars to computers, clothes and TVs.     

The RBA's preferred measure of underlying inflation braked to a decade low around 2.15 per cent in the first quarter, near the floor of its long term target band of 2-3 per cent.     

The RBA is now expected to cut forecasts for both economic growth and inflation in its quarterly statement on monetary policy, to be released on Friday.     

"Over the coming one to two years... inflation will probably be lower than earlier expected, but still in the 2-3 per cent range," Stevens said on Tuesday. – Reuters

Tags: Central Bank | inflation | Australia | Sydney |


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