RBA pressured to think big on rates
April 10, 2009
In March the central bank was seen as keeping some ammunition in reserve for gloomier days, but in April it appears to have fired a blank.
The major banks' decision to pass on just of a fraction - or, in one case, nothing - of the 25 basis point interest rate reduction by the Reserve Bank of Australia (RBA) at its April board meeting has brought into question the effectiveness of monetary policy.
After all, the central bank cuts interest rates in an attempt to stimulate the economy, and if the average Australian isn't getting the full benefit they are less likely to be able rush out and spend money.
'The (retail banks') response has placed a big question mark over the effectiveness of monetary policy in a lot of the population's mind,' Macquarie Bank senior economist Brian Redican said.
'It actually puts more pressure on the Reserve Bank to move aggressively soon to re-establish that relationship in people's minds.'
Last month, after 400 basis points of cuts to the official cash rate over five consecutive board meetings, the RBA decided to leave interest rate policy unchanged.
The minutes of that meeting showed it was a close run thing between cutting rates again and holding policy steady, leaving economists equally split over the timing of the next rate reduction.
There was already plenty of stimulus in the economy through rate cuts and fiscal action by the federal government, and its inaction was widely seen as the RBA keeping something up its sleeve for when the economy slumps into recession and unemployment goes through the roof.
But data since that meeting was grim. Economic growth contracted for the first time in eight years, while the jobless rate spiked above five per cent.
At the same time, the major banks were warning that they might not be able to match another official interest rate given the rising trend in their own funding costs.
Economists' forecasts for the April decision ranged from a 50 basis point cut to unchanged.
In the event, the RBA went halfway, taking the cash rate from 3.25 per cent to 3.0 per cent, a 49-year low.
But the banks found that amount too much to pass on.
Of the four major banks, three could only manage a 10 basis point reduction, while National Australia Bank had nothing to offer at all.
The average home owner with a $300,000 mortgage should be getting around $45 a month off their monthly home loan repayment.
Instead, after the banks' miserly response, they will get just around $15, or nothing in the case of NAB customers.
Hardly the stimulus the central bank would have been looking for.
So what now for future rate reductions?
Financial markets are still betting on an eventual cash rate of 2.0-2.25 per cent this year, and Thursday's data showing a further leap in the unemployment rate to 5.7 per cent backs up that case.
Some economists believe the days of the big interest rate cut are over, and that the RBA will drip-feed cuts from now on.
'We see a high risk that the unemployment rate will continue to rise rapidly over coming months, a key reason why we continue to believe that the RBA is likely to continue cutting the cash rate - possibly in a series of 25 basis point cuts - to a terminal rate of 2.0 per cent later in the year,' Nomura Australia chief economist Stephen Roberts said.
Others believe there is now extra pressure on the central bank to make a big impression given the reaction of the retail banks this time around.
'I'm not one of those people that suggests the Reserve Bank should keep some ammunition in reserve to protect the masses when unemployment eventually rises,' Macquarie's Mr Redican said.
'You try to prevent the damage rather than repair it afterwards.'
Sky News
