Reserve Bank cuts interest rate 'beyond emergency levels'
UPDATE: WHILE most industry lobby groups have welcomed the Reserve Bank's 25 basis point interest rate cut, self-funded retirees will be hit hard, National Seniors chief executive Michael O'Neill said on Tuesday.
The cut saw the official cash rate drop to 2.75%, on the back of subdued credit demand.Westpac, Commonwealth Bank, National Australia Bank and Bank of Queensland immediately moved to pass on the full rate cut.
Treasurer Wayne Swan said it was an endorsement of the Federal Government's fiscal management, despite the troubles of the high Australian dollar.
He said it would save $5500 a year on mortgage repayments for those with a $300,000 variable home loan, compared with 2007 figures when Labor came to power.
Shadow Treasurer Joe Hockey described the cut as "beyond emergency levels", highlighting that economic growth was not what was expected.
"This has been undertaken by the RBA not because the economy is doing well, but because the economy is not doing well," he said.
In its decision, the RBA board noted the continued high Australian dollar was a concern, moments before the market saw the dollar drop to just over parity with the United States currency.
The board also noted it was using only "some of the scope" for interest rate cuts, leaving the door open for further possible cuts later this year.
Mr O'Neill said the low, fixed incomes of many retirees were set to fall, partly due to the rate for aged pensions not keeping pace with falls in the cash rate.
"This rate cut will come as a blow for seniors living off simple investments such as term deposits," he said.
"Official deeming rates, used to determine age pension levels, have not kept pace with falling interest rates while essentials such as electricity and gas continue to soar around the country."
But complaints from the retiree sector were largely drowned out by the housing industry, business and heavy industry supporting the RBA decision.
Housing Industry Association chief economist Harley Dale said the cut boosted the chance of a sustainably recovery in construction activity.
Australian Chamber of Commerce and Industry chief Peter Anderson said small business, particularly, needed the full rate cut to be passed on by lenders.
"The focus needs to shift quickly to the commercial banks so they don't delay passing on the full benefit of this decision to both business and household borrowers," he said.
What the rate cut saves you*:
- On a $500,000 mortgage: $104 a month
- On a $450,000 mortgage: $94 a month
- On a $400,000 mortgage: $83 a month
- On a $350,000 mortgage: $73 a month
- On a $300,000 mortgage: $63 a month
- On a $250,000 mortgage: $52 a month
*Based on 0.25% reduction to 6.38% interest rate on a 25 year standard variable home loan.
Reserve Bank cuts interest rates to record low of 2.75%
THE National Australia Bank has become one of the first to announce it will pass on today's official interest rate cut the full 25 basis points.
In a statement NAB said it would now slash its home loan mortgage to 6.13 per cent per annum.
Bank of Queensland and ING direct will also pass on the full cut.
The reduction will save customers $62.50 per month in interest on the average $300,000 home loan.
"We recognise that certainty is important for our customers, which is why we are pleased to be able to quickly pass on a 25 basis point reduction," Gavin Slater, Group Executive Personal Banking. said.
The Reserve Bank cut interest rates for the first time this year by 25 basis points to a record low of 2.75%.
The new rate will be effective from tomorrow, May 8.
The Australian dollar fell almost immediately giving good news to exporters and manufacturers.
Real Estate Institute of Australia president Peter Bushby said the Reserve Bank had made a sensible decision.
"A fall in retail sales and job advertisements, subdued inflation well within the RBA's target zone are all good reasons for another cut," Mr Bushby said.
"If the banks do pass on the .25 percentage points cut in full, the average loan repayment will be $481 per week.
"This is $115 per month less compared to the figure recorded a year ago and will substantially ease the mortgage stress on Australian home owners."
"Housing affordability improves by 2.3% with the proportion of the median family income to meet average loan repayments decreasing from 30.4% to 29.7%."
"The proportion of first home buyers in housing finance commitments for February 2013 was 14.4% - less than half of that in May 2009 (31.4%) and well below the long-term average of 20.2%.
"The market has remained relatively flat and housing affordability has been very slowly improving over the past five quarters.
"Potential home buyers need encouragement to enter the market and this pre-Budget cut is most welcome.''
Banks urged to pass rate cut on in full
The Bank Reform Party called on all banks to immediately pass on rate cuts to customers.
"Australians are sick and tired of the banks not passing on rate cuts while they complain they are doing it tough while making record profits," BRP leader Adrian Bradley said.
"First half profits posted by Westpac and ANZ last week demonstrate yet again that the banks are more than capable of extracting exceptional profits in the current market conditions and now they must do the right thing by customers, the people who have made them among the most profitable banks in the world."
"Banks are simply gouging and getting away with it, while insulting the intelligence of their customers by claiming market conditions are tight while funding costs rise," Mr Bradley said.
The Board's decision was released as follows.
The global economy is likely to record growth a little below trend this year, before picking up next year. Among the major regions, the United States continues on a path of moderate expansion and China's growth is running at a more sustainable, but still robust, pace.
Japan has announced significant new policy initiatives aimed at strengthening demand and ending deflation. The euro area remains in recession. Commodity prices have moderated a little in recent months though they remain high by historical standards.
Financial conditions internationally continue to be very accommodative, with risk spreads reduced, funding conditions for most financial institutions improved and borrowing costs for well-rated corporates and sovereigns exceptionally low.
Growth in Australia was close to trend in 2012 overall, but was a bit below trend in the second half of the year, and this appears to have continued into 2013. Employment has continued to grow but more slowly than the labour force, so that the rate of unemployment has increased a little, though it remains relatively low.
With the peak in the level of resources sector investment likely to occur this year, there is scope for other areas of demand to grow more strongly over the next couple of years.
There has been a strengthening in consumption and a modest firming in dwelling investment, and prospects are for some increase in business investment outside the resources sector over the next year.
Exports of raw materials are increasing as increased capacity comes on stream. These developments, some of which have been assisted by the reductions in interest rates that began 18 months ago, will all be helpful in sustaining growth.
Recent data on prices confirm that inflation is consistent with the target and, if anything, a little lower than expected.
The CPI rose by 2½ per cent over the past year, and measures of underlying inflation gave a broadly similar outcome.
These results have been pushed up a little by the impact of the carbon price. Growth of labour costs has moderated slightly over recent quarters while productivity growth appears to be improving.
This should help to lessen increases in prices for non-tradables. The Bank's forecast remains that inflation over the next one to two years will be consistent with the target.
Over recent meetings, the Board has noted that interest rates have already been reduced substantially, with borrowing rates approaching previous lows, and that the effects of this on the economy are continuing to emerge.
Savers have been changing their portfolios towards assets with higher expected returns, asset values have risen and some interest-sensitive areas of spending have increased.
The exchange rate, on the other hand, has 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. Moreover, the demand for credit remains, at this point, relatively subdued.
The Board has previously noted that the inflation outlook would afford scope to ease further, should that be necessary to support demand.
At today's meeting the Board decided to use some of that scope. It judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy, consistent with achieving the inflation target.