Wednesday, June 20, 2012

The rate cut was a closer thing than we thought

Even the RBA says the arguments were "finely balanced"

The Reserve Bank’s decision to cut its cash rate this month was a close-run thing. Minutes released yesterday describe the discussion of the 0.25 point cut as “finely balanced”. On one hand was domestic data which “generally had not suggested a significant weakening in conditions”. On the other was “clear evidence suggesting a softening in global conditions,” and increased uncertainty about the future in Europe.

The minutes note that lenders passed on only 0.30 to 0.40 points of the 0.50 point cut in May. As a result, typical interest rates on outstanding home loans were around 0.40 points below their long-term average, while rates on small and large business loans were 0.30 and 0.60 points lower.

The minutes indicate sympathy for lenders who hadn’t passed on the full 0.50 points referring to “strong competition among banks for term deposits and the continuing pressure this was having on the funding costs”.

They also quantify the contractionary effect of the May budget saying it is likely to be “considerably less” than the 3 per cent implied by the move to surplus... A range of 0.75 to 1.50 per cent is more likely, given the timing of the measures and the preponderance of cuts to spending which would have been offshore.

Deutsche Bank economist Adam Boyton said the minutes seemed to imply the prospect of a further easing in July was remote. But he said he still expected cuts amounting to 0.50 points by the end of the year.

In today's Sydney Morning Herald and Age

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