Tuesday, February 07, 2012

The chance of a rate cut today? RBA:50-50 Markets:100%

We'll know at 2.30 pm AEDT

A betting plunge on financial markets rates an interest rate cut as good as certain after weak retail sales figures appearing to show the worst growth on record.

The Reserve Bank board meets this morning in Sydney to consider whether to cut the official cash rate a further 0.25 points to 4 per cent, conscious that three of the big four banks have signalled they are unlikely to pass on any cut in full.

Treasurer Wayne Swan said yesterday customers “would be rightly angry if their bank decided to withhold any cut”.

“Banks should think long and hard about taking their customers for granted,” he said, pointing to new rules that made it easier for customers to switch if they found better deals.

Retail spending finished the year flat in seasonally adjusted terms in the three months to Christmas, dashing hopes of an end of year recovery.

Over the year to December retail spending grew just 2.4 per cent - the weakest annual growth in records dating back 50 years...

The Bureau of Statistics said after adjusting for inflation the quantity of goods bought climbed 1.4 per cent, merely in line with population growth.

‘‘I think we’re now starting to look at some very dangerous territory in terms of retailers having to close their doors and perhaps a significant loss of jobs,’’ said Australian National Retailers Association chief Margy Osmond. ‘‘Retail employs over 1.2 million people across Australia, it’s the biggest private sector employer.”

But the Reserve Bank has indicated previously it no longer regards retail figures as accurately depicting consumer spending. More consumer spending is taken place online away from shops and more is on services such as international travel, also not captured in the retail figures.

The Bank believes inflationary pressures are low enough to allow it to cut rates, but not so low as to require it to do so at today’s meeting, making the outcome of the meeting hard to predict.

Futures traders threw caution to the wind after the retail figures, their pricing pushing up the implied probability of a cut today from 73 per cent to 100 per cent.

Online bookmaker sportsbet.com.au will pay out only $1.25 on a $1 bet of a rate cut, but will pay out more than $2 on any of the banks actually passing it on in full.

ANZ decoupled itself from the Reserve Bank deliberations in December declaring its funding costs “largely unrelated to movements in the Reserve Bank’s official cash rate”.

It will now decide whether to move rates on the second Friday of each month, well away from the Reserve Bank’s decision on the first Tuesday.

National Australia bank chief Cameron Clyne has also declared there is no necessary correlation between the Reserve Bank’s moves and his bank’s cost of funds. Westpac chief Gail Kelly said her funding costs are now higher than at any time during global financial crisis.

Moodys rating service yesterday identified Australian and New Zealand banks as the most exposed in the Asia Pacific to high refinancing risks should the European financial crisis worsen.

“The proportion of external funding is 19 per cent for Australia and 16 per cent for New Zealand,” it said. “This exposes banks in both systems to refinancing risks in the event of wholesale market stress.”

Mr Swan said Australian banks remained very profitable with very healthy returns on equity and margins. Since it had become easier to switch banks the growth rate in loans at non-major banks had more than doubled.

The ANZ’s count of job advertisements jumped an encouraging 6 per cent in seasonally adjusted terms in January, lifting it up 0.7 per cent over the year. The ABS reported no jobs growth in the year to December, the worst performance in two decades.

Published in today's SMH and Age

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