By Jessica Irvine Economics Correspondent SMH
November 5, 2008
THE Reserve Bank is mounting its most aggressive campaign of interest rate cuts in a quarter of a century in a bid to avert recession but mortgage holders are not getting the full benefit.
Yesterday's surprise 0.75 percentage point cut, if passed on in full by the banks, will save almost $200 a month in repayments on a $400,000 loan. That brings to $545 the total saving on the same loan since the Reserve began cutting rates in September.
In nine weeks, the bank has slashed its official cash rate by two percentage points, undoing nearly four years of rate rises.
More official interest rate cuts are expected before Christmas, with financial markets tipping another 0.75 percentage point move on December 2.
But the nation's biggest mortgage lender, the Commonwealth Bank, risked the wrath of home borrowers and the Federal Government by announcing it would pass on just 0.58 percentage points of the cut to customers. This will short-change them by about $50 a month on a $400,000 loan.
Commonwealth's head of retail banking, Ross McEwan, blamed the decision on higher costs for wholesale borrowing and deposits, and said mortgage holders could expect to get the rest when markets "normalise".
But the Treasurer, Wayne Swan, appeared to lose his patience, saying he was disappointed. "I want to see them pass this on in full as rapidly as possible," he said.
Amid the deteriorating economic outlook, the Government is expected, today or tomorrow, to release updated budget and economic forecasts, revealing the full impact of the global financial crisis on four years of the budget bottom line.
Revenue is understood to be down as much as $10 billion in some years, as capital gains and company tax collections are hit by global sharemarket declines, weaker global growth and tumbling commodity prices.
In his statement accompanying the Reserve Bank's decision, the governor, Glenn Stevens, said that plunging world commodity prices, "significant weakness" in big industrial economies, and signs of a further slowing in China had made it clear that "a further significant reduction in the cash rate was warranted".
While the Government's $10.4 billion spending program to stimulate the economy would help support growth, along with a falling dollar and reductions in borrowing rates, "on balance, it appears likely that spending and activity will be weaker than earlier expected".
Other banks were happy to leave the Commonwealth out on a limb yesterday, refusing to announce how much of the rate cut they would pass on.
A spokeswoman for NAB said its rates were "being reviewed" against overnight developments on money markets to see how much could be passed on. Banks have benefitted in recent months from a flood of money into deposits, accelerated by the Government's decision to guarantee all bank deposits.
The Opposition Leader, Malcolm Turnbull, said banks had no excuse not to pass on the cut in full. "They have the capacity to do so and they ought to do so. The banks have been receiving a lot of support through guarantees from the Government. They are strongly profitable."
The Reserve expects inflation, which has hit 5 per cent, "will soon start to fall". However, the fall in the dollar, which makes imported goods more expensive, meant inflation would take longer to subside.
"The board will continue to monitor developments and make adjustments as needed to promote sustainable growth consistent with achieving the 2-3 per cent inflation target over time," the bank said.
The chief economist at Deutsche Bank, Tony Meer, said the Reserve was attempting to "recession-proof" the economy in the way it had failed to do in the early 1990s. "Clearly the bank's concern today is the same as it was back then … that the economy is heading into recession and aggressive action is required to mitigate … the prospect of the recession being deep and prolonged."
A survey of more than 1800 businesses by the Australian Chamber of Commerce and Industry released yesterday found business conditions were at their worst since the early 1990s. Companies expected to sack staff and cut back on overtime as conditions cooled.
Economists said yesterday's larger-than-expected rate cut revealed elevated concern at the Reserve Bank about Australia's growth prospects.
Craig James, chief equities economist at CommSec, said these concerns had led to the most aggressive rate cuts since the dollar was floated in 1983.
The chief economist at Morgan Stanley, Gerard Minack, predicted that next year Australia would face its first recession in 17 years.
"The aggressive response of policy makers will likely not be enough to offset the combination of global recession, global credit crunch and the unwind of domestic imbalances."
