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Wednesday, September 03, 2008

The announcement

It's here

Australia’s Reserve Bank has signalled that its latest interest rate cut – the first in 7 years – could be a one-off as a plummeting Australian dollar has injected new uncertainty into Australia’s economic outlook.

The dollar slid two complete US cents to fell below $US0.84 for the first time in a year on the back of both sharply falling Asian oil and gold prices and the Reserve Bank’s interest rate decision.

The Reserve Bank’s cut in its cash rate of 0.25 per cent announced at 2.30pm and was backed up within minutes by each of the private banks.

The ANZ announced a 0.25 per cent cut in its mortgage rate at 2.36pm; the Commonwealth and Westpac at 2.37pm, and the National Australia Bank at 2.39pm...

Westpac’s cut will come into effect tomorrow The National Australia Bank’s on Friday and the ANZ and the Commonwealth’s on Monday.

For a Victorian with the average mortgage of $256,600 the saving will be $44.16 a month or $530 a year.

The Treasurer Wayne Swan welcomed the banks’ response after being passed a note in Parliament, declaring that he had made it “very clear indeed” that he expected the banks to pass on the cut in full in a reasonable time.

The Reserve Bank’s move was “very welcome news for Australian families and the Australian economy and good news which should be celebrated by all in this House”.

The Shadow Treasurer Malcolm Turnbull said the move was a response to a collapse in consumer and business confidence that had followed the November election. He asked whether it was the result of “the slowdown we had to have”.

The Reserve Bank’s statement gives no hint that it will follow up the cut, stressing the importance of bringing inflation back under control rather than the importance of keeping the economy growing.

Notably absent from the statement is the commitment to “make adjustments as required in order to promote sustainable growth” that was present in the Bank’s August statement.

Instead the statement speaks only about the need to
“set monetary policy as needed to bring inflation back to the 2-3 per cent target”.

The Board’s members are believed to feel that there was no case for the bigger rate cut of 0.5 percentage points suggested by the Leader of the Opposition and that there is no case at the present time for a further cut.

The statement said that the Reserve Bank had set out to restrain demand in order to contain inflation and that its rate increases as well as tighter credit conditions and higher fuel costs had “exerted the needed restraint”.

While the rise in Australia’s terms of trade was working in the opposite direction, “adding substantially to national income and ability to spend” on balance it was likely that overall economic growth would slow and that inflation would decline over time - provided wage growth remained contained.

The cautious statement suggests that the first cut in seven years may well be a one-off for the moment just as the sole rate hike in 2005 wasn’t followed up for more than a year.