Monday, June 04, 2012

A cut of 0.50 points? Again?

Things are looking bleak

The Reserve Bank is being urged to cut rates a further 0.50 points at its board meeting tomorrow in a dramatic bid to head off a downward spiral in confidence ahead of the introduction of the carbon tax on July 1.

The cut would follow the cut of 0.50 points in May and the two cuts of 0.25 percentage points in November in December. Combined they have cut the Reserve Bank’s cash rate from 4.75 to 3.75 per cent and taken the standard variable mortgage rate from 7.80 per cent to around 7.04 per cent.

AMP Capital chief economist Shane Oliver who is pushing for the cut says he doesn’t expect it to be fully passed on to borrowers.

“That’s one of the reasons the Reserve Bank should and will cut 50 points,” he told the Herald. “The trouble with doing 0.25 points is the banks will only pass on some of it. Westpac could afford to pass on the lot but I can’t see the others doing it.”

“Since the board last met we have seen further deterioration in Europe, universally poor Chinese data, and a turndown in the United States. At home house prices are turning down again and unemployment is set to climb"...

Dr Oliver expects Australia’s unemployment rate to climb to 5.2 per cent when the figures are released Thursday and to head toward 6 per cent by the end of the year. He expects the economic growth figures released Wednesday to remain below their long term trend.

“With the non-mining economy so weak and the overall economy growing below trend confidence is fragile. We’re hearing bad news on Europe, on house prices, on the United States and on China. Now we are about to get the carbon tax.”

“You could mount a logical argument that the Reserve Bank can afford to wait a month before cutting - financially it shouldn’t make much difference. But the impact on confidence would be immense. Households are hoping for a rate cut. Without one there’s a significant risk of psychological damage, of a downward spiral.”

Dr Oliver backs up Westpac chief economist Bill Evans who said Friday he saw a series of Reserve Bank cuts between now and Christmas taking the cash rate down from 3.75 per cent to 2.75 per cent.

The futures market is pricing in a cut to 2.75 per cent by August and a cut of more than 0.25 points tomorrow. The pricing reflects a dive in Australian 10-year government bond yields to around 2.8 per cent Friday, the lowest in 40 years. Increasing concern about the international economy is forcing investors to accept lower interest rates in return for the privilege of parking their money with the Australian government, which they regard as relatively safe.

The past week has brought news of big withdrawals from Spanish banks as 97 billion euro ($A124 billion) left the county, much weaker than expected growth in Chinese manufacturing and an upturn in US unemployment to 8.2 per cent.

Commodity prices fell sharply, the oil price sliding 8 per cent and the copper price 3.9 per cent. The Australian dollar slid to 97 US cents - its lowest point in eight months.

Treasurer Wayne Swan said the international news was a “reminder of how much better our economy has performed over the past few years”.

Returning the budget to surplus gave the Reserve Bank “room to cut interest rates further if the independent board thinks that’s necessary”.

In today's Sydney Morning Herald and Age

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