Wednesday, May 08, 2013

The stubbornly high Aussie. Why the RBA cut and will cut again

Deep concern about the high Australian dollar drove the Reserve Bank to cut its cash rate to the lowest level on record Tuesday, a cut quickly passed on by all but one of the big banks.

The board acted without waiting to know what was in next week’s budget after being told that the mining investment boom might have peaked and there was insufficient activity elsewhere in the economy to take its place. Information supplied to the Bank by mining companies suggested the peak “may well be upon us.”

Instead of sliding with minerals prices as would have been expected, the Australian dollar has remained high during a year in the price of Australia’s resource exports has slipped 9 per cent.

Denied the chance to become more internationally competitive, non-mining businesses have failed to invest as the Reserve Bank wanted. The Bank has also found that mortgage holders banked most of its two most recent rate cuts by boosting repayments rather than borrowing more.

The cut in the cash rate from 3 to 2.75 per cent takes it below what the government dubbed the “emergency levels” it fell to during the global financial crisis. The rate is lowest since the bank began publishing its cash rate at the start of the 1990s. An older series of records suggests it is the lowest since 1959 - when Elvis Presley was in the US army, John Lennon and Paul McCartney had not yet named their band The Beatles and Robert Menzies had just started his record run as Australia’s prime minister.

Financial markets expect further records to tumble. Futures trading late Wednesday predicted another cut of 0.25 points within three months.

Treasurer Wayne Swan rejected as “grossly inaccurate” the suggestion rates were now at lower than emergency levels.

Wider margins mean the rates charged to bank customers are still well above those that prevailed during the 2008-09 crisis.

The standard variable mortgage rate hit a low of 5.75 per cent during the crisis. Even after Tuesday’s cut the lowest standard bank rate will be 6.13 per cent, offered by the National Australia Bank within minutes of the Reserve Bank’s cut in full.

The only big bank not to pass on the 0.25 per cent cut in full was the ANZ whose rate committee meets on Friday.

The cut will slice a further $47 from the monthly cost of servicing a $300,000 loan, taking the monthly saving since 2007 to $456...

Shadow Treasurer Joe Hockey said it would only be good news for the economy if it kick-started credit growth.

“This has been undertaken by the Reserve Bank not because the economy is doing well but because the economy is not doing well,” he said.

“The Bank has taken this leadership position because the budget is in chaos and the government is not providing leadership.”

Governor Glenn Stevens highlighted the stubbornly high Australian dollar in a statement accompanying the cut saying it had been “little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates during that time”.

Demand for credit remained “relatively subdued”.

The Bank will watch closely official data on business investment, wholesale prices and employment during the next month as well as assessing the impact of the budget before deciding what to do next.

In today's Sydney Morning Herald and Age

Standard rates this morning

NAB: 6.13% (down 0.25 points)

Commonwealth: 6.15% (down 0.25 points)

Westpac: 6.26% (down 0.25 points)

Bank of Queensland: 6.26% (down 0.25 points)

ANZ: 6.40% (rate committee meets Friday)

Bendigo Bank 6.51% (under consideration)


$20,000 $3

$40,000 $6

$60,000 $9

$80,000 $12

$100,000 $16

$150,000 $23

$200,000 $31

$250,000 $39

$300,000 $47

$350,000 $54

$400,000 $62

$450,000 $70

$500,000 $78

$600,000 $93

$700,000 $109

$800,000 $124

$900,000 $140

$1,000,000 $155

Assumes 25 year 6.20% variable mortgage

Related Posts

. April: What's the RBA's Plan A? Hoping something comes up

. RBA in March. Quietly happy, prepared

. February. Why it's it's on standby to cut again