Wednesday, November 02, 2011

The cash rate is low, mortgage rates are not

The graph sets it out

Two of the big four banks have passed on in full the Reserve Bank’s 0.25 point Melbourne Cup Day rate cut and the others are set to follow within days.

The cut in the Reserve Bank’s cash rate from 4.75 to 4.50 per cent will take Westpac’s standard variable mortgage rate to 7.61 per cent and the Commonwealth Bank’s to 7.56 per cent, slicing $49 from the monthly payment on a $300,000 loan.

If the National Australia Bank also cuts by 0.25 points its standard variable rate will drop to 7.42 per cent, the lowest of the big four and the first below 7.5 per cent in a year.

The Reserve Bank last adjusted rates on Melbourne Cup Day 2010, inching them up 0.25 points because of concern about inflation, but each of the big banks passed on more, the Commonwealth Bank pushing up its mortgage rate by almost twice the Reserve Bank move sparking outrage among customers and talk by the Treasurer of tough moves to reign in the banks.

Those moves mean that even though the Reserve Bank’s cash rate is back to where it was, the big bank’s official rates remain much higher, although discounting means new customers can expect a better deal if the shop around.

The Commonwealth Bank cut comes into effect Friday, Westpac’s a week later.

A $300,000 mortgage holder will be $5000 per year better off than when mortgage rates peaked at 9.6 per cent before the financial crisis and $5400 worse of than when mortgage rates hit 5.1 per cent in the depths of the crisis.

Neither of the two banks has announced a cut to its less politically sensitive business and credit card rates, each saying they are “under review”.

The Reserve Bank statement characterises the cut as a one-off... omitting the usual reference to rates remaining under review, saying instead rates are now “consistent with achieving sustainable growth and 2 to 3 per cent inflation over time.”

The bank cut because underlying inflation has moved back to the middle of its target band, allowing it to adjust setting from “mildly restrictive” to “more neutral”. Previously alarmed by the inflation outlook it is now forecasting inflation consistent with its target band for the next two years “abstracting from the impact of the carbon pricing scheme”.

The Bank believes commodity prices have peaked, taking some pressure off off the economy. Its monthly commodity price index released after the meeting was down 3.9 per cent.

The futures market is pricing in an 80 per cent probability of a further cut in December.

The dollar slid three quarters of a cent to 104.47 US on expectations of further cuts. It
lost a further cent in early European trade, sliding below 103.50 US.

“Effectively the Bank has admitted it it got it wrong,” said Commonwealth Securities economist Craig James. “In August it was set to hike rates, but it has become abundantly clear inflation is under control and financial conditions have been tighter than necessary.”

“The Bank has now moved back to a more neutral stance – that suggests rates could move either way in coming months. If rates are moving anywhere in the short term, clearly it’s down, rather than up.”

Published in today's SMH and Age

State & Territory Breakdowns

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