Wednesday, October 03, 2012

Why did the RBA cut? The resources boom is about to peak

Access was pilloried for saying it could happen by 2014. Now the Reserve thinks it'll be 2013

Me on ABC Adelaide 891 this morning

16 minutes, play or CLICK THEN CLICK AGAIN to download mp3

How much you’ll save

If the banks pass it on


$20,000 $3
$40,000 $6
$60,000 $9
$80,000 $13
$100,000 $16
$150,000 $24
$200,000 $31
$250,000 $39
$300,000 $47
$350,000 $55
$400,000 $63
$450,000 $71
$500,000 $79
$600,000 $95
$700,000 $110
$800,000 $126
$900,000 $142
$1,000,000 $158

Assumes 25 year 6.85% variable mortgage

The Reserve Bank has cut interest rates to the lowest point since the 2009 financial crisis amid concern the mining investment boom will peak sooner and lower than expected. It is on standby to cut rates again at its November board meeting on Melbourne Cup Tuesday.

Iron ore and coal mining companies have told the Bank they are putting their investment plans on ice sooner than expected because they can no longer be certain prices will stay high. They have told the Bank the rebound in prices over the past month gives them little comfort because they can’t be confident they won’t slide again.

The September commodity price reading released by the Bank late yesterday  shows the Australian dollar prices of Australian exports have slid 18 per cent over the past twelve months.

The Bank has brought forward its estimate of the peak in mining investment from 2013-14 to 2013. It believes the economy will need stimulus as mining investment falls away and the right time to start providing it is now, given the long lead times involved in boosting activity.

The 0.25 point cut will take the Bank’s cash rate to 3.25 per cent, the lowest since October 2009. A further cut at the November board meeting would take it to 3.00 per cent, the floor at which it stayed for six months during the financial crisis...

They will be guided by investment intentions, global economic developments and the strength of Australian dollar in deciding whether to cut again on Melbourne Cup Tuesday.

Although it is not cutting rates in order to cut the dollar it believes the stubbornly high dollar is depriving Australia of export income it would have expected to earn as the dollar fell in line with plunging commodity prices.

The Australian dollar slid 0.60 US cents to a low of $1.0295 on the news. The share market gained 1 per cent.

If fully passed on the cut will slice a further $47 of the monthly cost of servicing a $300,000 loan. The Reserve Bank’s four most recent cuts in November, December, May and June have cut a total of $190 from monthly repayments.

Treasurer Wayne Swan said the cut meant a family on a $300,000 mortgage would pay around $4500 less per year than when the Coalition left office.

“It’s a welcome dividend from responsible budget management. It is good news for families and small businesses right across Australia,” he said.

Shadow treasurer Joe Hockey said rates was now just one step away from what Mr Swan had previously described as the “emergency levels” needed during the global financial crisis.

“The Reserve Bank is no longer as confident about the outlook for growth,” he said. “I have been warning for some time Australia can no longer rely on record high commodity prices to boost economic growth and the budget bottom line.”

Mr Swan appealed to banks not to “crib” or “crimp” something from the cut. The Bank of Queensland was the first to respond passing on only 0.20 points of the 2.25 point cut, bringing its mortgage rate to 6.71 per cent. The big four have yet to announce their decisions.

In today's Canberra Times, Sydney Morning Herald and Age

What you’ll pay

Standard rates this morning

Bendigo Bank 6.90% (unchanged)
Westpac: 6.89% (unchanged)
Commonwealth: 6.80% (unchanged)
ANZ 6.80% (unchanged)
NAB 6.78% (unchanged)
Bank of Queensland 6.71% (down 20 points)

Related Posts

. Why the RBA cut rates

. Mining. Now we're forecasting the first downturn since the GFC

. September. Situation no longer normal. The Reserve prepares to ease