NAB has also cut is rate by 0.25%
That’s about it for the blog. Thanks for reading on this momentous afternoon. Mortgage holders will be grateful for the extra bucks but savers will be counting the cost.
These are the main points:
- The RBA, as widely expected, has cut the cash rate from 1.5% to a fresh historic low of 1.25%.
- The RBA governor Philip Lowe said the move would help reduce unemployment and boost inflation back towards its 2-3% target range.
- He remains optimistic about the Australian economy, seeing 2.75% growth this year and next, despite some headwinds from the US-China trade dispute.
- ANZ was the first big bank to cut its lending rate, knocking off 0.18%. CBA has passed on the full 0.25%.
- Treasurer Josh Frydenberg welcomed the RBA cut but said ANZ had “let down” its customers and that the bank’s decision was “deeply disappointing”.
- The Aussie dollar stayed pretty flat after the RBA announcement, settling at US69.76c at 4pm.
- The ASX200 closed at up 15 points, or 0.25%, at 6336.
- Many economists expect the RBA to cut rates at least one more time this year. Capital Economics thinks the rate could hit 0.75%.
- Philip Lowe will make a speech in Sydney tonight which might shed more light on how he sees rates panning out.
Our economics expert Greg Jericho has been looking at the RBA decision and concludes that the government should feel “great shame” at such a low lending rate.
Even during the global financial crisis the cash rate stayed generally 1% above the inflation rate. Having to cut it so low during a period when the economy is growing (albeit slowly) and unemployment is just above 5% is a pretty sad indictment of how the economy has been handled.
Read his whole piece here:
This is interesting. The money-saving site mozo.com.au has done a very quick calculation about how the ANZ will be saving by only cutting its standard rate by 0.18% rather than the full 0.25%. They’ve also looked at how much it saves by delaying implementation of the cut for nine days.
Using Apra’s monthly banking stats on the big four banks’ loan book values, Tom Godfrey of Mozo says:
By delaying their partial cut by nine days ANZ is banking $13.4m. Also, by holding back 7 basis point ANZ is set to rake in $152.5m over the year.
Welcoming the CBA’s move to give the whole 0.25%, Tom nevertheless points out it is saving a fair bit by delaying the cut:
It’s encouraging that CBA is passing on the full 25 basis point cut but by delaying the date it takes effective until June 25, CBA is banking $50m.
In a statement the CBA said its move meets “community expectations” ie what the public wants.
Angus Sullivan, the retail banking boss, says:
We have carefully considered the RBA rate decision and the current funding environment, together with how we continue to meet our regulatory commitments, capital requirements, and community expectations.
Here’s the statement in full.
Commonwealth Bank cuts standard rate by 0.25%
The Commonwealth has passed the rate cut on in full to its customers.
Some more reaction to this afternoon’s events. Labour’s Andrew Leigh raises the “mismanagement” issue. (Surely a blunder that they failed to make more of that in the election campaign):
The ANZ move is a big talking point. The team at RateCity point out that the small lenders Athena, RACQ and Reduce Home Loans have all passed on the cut in full.
Sally Tindall, research director at RateCity.com.au, said all lenders needed to step up and pass on the cut in full.
ANZ’s decision to not pass on today’s cut in full is a huge disappointment and now all eyes will on the remaining Big Banks to see if they can go one better. Reduce, RACQ and Athena were the first out of the starting blocks. This now puts immediate pressure on other lenders to pass the full cut on to both their new and existing customers.
He’s also asked if the RBA cut is a sign that the economy is in trouble. After all, rates are basically at an emergency level never seen before, and have been for some years now.
He dead-bats the question, saying the “fundamentals are sound”. Unconvincingly, he points to Philip Lowe’s statement as proof. The governor says the economy will grow by 2.75%, so it will, OK?
You have heard from the Reserve Bank Governor today. He said employment growth has been strong and the central scenario remains for the Australian economy to grow by around 2.75% for 2019 and 2020. That was the comment from the Reserve Bank Governor today in his statement.
Frydenberg’s press conference is continuing.
He has been asked if he thinks the bank’s own borrowing costs have been reduced by this cut. Banks have sometimes claimed that their costs are not reduced by such cuts and therefore can’t afford to pass them on to customers.
Frydenberg says that he thinks their costs have come down:
In my conversations with the bank CEOs and chairman they have made it clear that some of their funding costs have come down. So this is a 25-basis-point reduction. It is the first movement in around three years and so in that sense it is significant but we would expect that the Australian people would see the benefit of these reductions in rates and the decision by the RBA and I’m very disappointed in the decision by the ANZ today.
The treasurer is quizzed about the ANZ cut, specifically what he thinks of the bank’s decision not to pass the cut on in full.
He says ANZ has “let down” its customers.
I think the ANZ has let down itscustomers. This is deeply disappointing from the ANZ. We heard from commissioner Hayne just months ago that the banks were putting profits before people. Actions like this don’t give the Australian people any comfort that the banks have changed their behaviour. And as treasurer of Australia I have made it very clear to the banks that the public have a legitimate expectation that they will see the full benefits of rate cuts such as announced by the RBA today.
Josh Frydenberg welcomes the cut
The treasurer is giving a press conference now. He says it’s “welcome news for Australian households and businesses” and saus the government expects the banks to pass the cut on to borrowers.
It is the government’s expectation, indeed, it is the public’s expectation that banks should pass on, in full, to consumers, the benefits of reduced funding costs as a result of the Reserve Bank’s decision. The impact of a 25 basis-point cut on a $400,000 mortgage is the equivalent of saving around $60 a month or $720 a year. A timely boost for households...
Rates could fall to 0.75%, says Capital Economics
If you thought 1.25% was low ....
The gurus at Capital Economics think the cash rate might fall as low as 0.75%, spruiking their own early predictions that the RBA would start cutting this year in the face of a falling housing market.
In a note after the RBA call, Capital notes the bank is sticking to its “glass-half-full rhetoric” about the Australian economy. But it believes most anlaysts are too optimistic about the outlook. It sees GDP falling to 1.5% compared with the bank’s 2.75% forecast and inflation staying at 1.7%.
The upshot is that we expect the RBA to slash rates to 0.75% before the year is out. Rates falling below 1% will surely heighten speculation that the Bank will soon launch quantitative easing but we think that’s rather unlikely.
ANZ cuts its lending rate by 0.18%
ANZ is first out of the blocks and into Josh Frydenberg’s good books by reducing its headline rate by 0.18% (18 basis points as they say in the jargon where 1% = 100bps).
Still keep 0.7% for itself though.
The governor is speaking in Sydney tonight at 7.30pm and might provide some more insights into how he sees the cut impacting the economy.
Until then, plenty of other people have an opinion:
The Aussie dollar has risen ever sop slightly to US69.76. That shows the 0.25% cut – an all-time low for rates here – was fully priced in and that some even thought the RBA could cut by 0.5%. It didn’t, so the Aussie actually rises.
The ASX200 has risen a little too. It’s up 14 points or 0.2% to 6334. The stock market just loves cheap money.
Lowe’s tour de horizon continues with detailed comments about unemployment, inflation and the housing market. On the former he pinpoints April’s rise to 5.2% as a key moment but says wages are still expected to see some improvement. Likewise with inflation, although it’s way below his target at the minute it’s going to rise to above 2% next year.
Employment growth has been strong over the past year, labour force participation has been increasing, the vacancy rate remains high and there are reports of skills shortages in some areas. Despite these developments, there has been little further inroads into the spare capacity in the labour market of late. The unemployment rate had been steady at around 5 per cent for some months, but ticked up to 5.2 per cent in April. The strong employment growth over the past year or so has led to a pick-up in wages growth in the private sector, although overall wages growth remains low. A further gradual lift in wages growth is expected and this would be a welcome development. Taken together, these labour market outcomes suggest that the Australian economy can sustain a lower rate of unemployment.
The recent inflation outcomes have been lower than expected and suggest subdued inflationary pressures across much of the economy. Inflation is still however anticipated to pick up, and will be boosted in the June quarter by increases in petrol prices. The central scenario remains for underlying inflation to be 1¾ per cent this year, 2 per cent in 2020 and a little higher after that.
The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities. Conditions remain soft, although in some markets the rate of price decline has slowed and auction clearance rates have increased. Growth in housing credit has also stabilised recently. Credit conditions have been tightened and the demand for credit by investors has been subdued for some time. Mortgage rates remain low and there is strong competition for borrowers of high credit quality.
The governor sticks to his guns about the Australian economy, predicting that it will grow by 2.75% this year and next. Big test for those numbers tomorrow in Q1 GDP data. He says investment in roads and rail is helping but the weaker outlook for domestic demand is not helping.
The central scenario remains for the Australian economy to grow by around 2¾ per cent in 2019 and 2020. This outlook is supported by increased investment in infrastructure and a pick-up in activity in the resources sector, partly in response to an increase in the prices of Australia’s exports. The main domestic uncertainty continues to be the outlook for household consumption, which is being affected by a protracted period of low income growth and declining housing prices. Some pick-up in growth in household disposable income is expected and this should support consumption.
RBA governor's statement
In his statement, governor Philip Lowe homes in on his two main concerns – jobs and inflation– in his up-summing:
Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time.
IT'S A CUT!!!
The RBA has cut rates to 1.25%
It’s coming ...
The US dollar has continued to slip amid all that talk about a possible Fed rate cut. With the Aussie dollar downside all-but totally priced in ahead of the RBA move, that could even mean a mini rally in the Aussie today.
Greg McKenna, strategist at McKenna Macro, told Reuters earlier that a Fed rate cut could be a circuit-breaker for the current gloomy market mood.
Unless there’s a circuit breaker, and it may come in terms of a Fed cut, or it may come in terms of more Chinese stimulus or the European Central Bank later this week ... equity prices and bond rates are going to continue to go lower.
The folks at the money-saving site mozo.com.au have attempted an analysis of how much the big four banks have saved by not passing on the last rate cut in full. Here is Tom Godfrey from Mozo:
We have calculated the ‘big four’ have pocketed approximately $3.6bn in revenue by not passing on the August 2016 cut in full. Also, by delaying the date at which their partial cuts in August 2016 took effect, they pulled in $7.1m per day - $113m in total.
For more detail on what a cut might mean for indebted homeowners, this is a useful thing:
While economists and traders will pore over the fineprint of the RBA’s statement at 2.30, the impact of a rate cut on other Australians will obviosuly depend on whether you are a mortgage holder or a saver.
Josh Frydenberg showed this morning that the votes are with the mortgage holders as he called on the banks to pass on any cut without delay. Borrowers with an average home loan of $400,000 would save about $58 on their monthly repayments if the cut was fully passed on.
“I expect all banks to pass on the benefits of sustained reductions in funding costs,” the treasurer said, adding that the royal commission should remind the banks that they are on notice. “The royal commission highlighted how the culture within financial institutions needed to improve ... and how the conduct had fallen below public expectations.”
The problem with inflation – or lack of it
Lowe said in his speech (see post below) that cutting rates would also help to lift inflation.
This is a crucial point. The bank is mandated to keep inflation between 2-3%, which is generally regarded as the optimum, Goldilocks level – not too high, not too low. It has failed to reach this target for more than three years but has held back from applying the obvious remedy of cutting interest rates in order to stimulate the economy and boost prices.
Its reluctance was due to concern about the impact of lower rates on already-soaring house prices. Declining property values have neutralised this issue but another key measure – unemployment – has remained low enough for the bank to argue that no stimulus has been needed. A recent rise in joblessness, however, could finally be the trigger for rates to come down today.
Quite why inflation has remained so stubbornly low despite a decade of cheap money in the wake of the global financial crisis has puzzled central bankers all over the western world. The conundrum is such that the US Federal Reserve is rethinking how it tackles inflation and whether it should even be that focused on the metric that has dominated conventional monetary policy since the 1970s.
Quite a lot of observers now think the Fed will join the rate-cutting set soon. We’re going to party like it’s 2008 all over again.
Does anyone think the RBA won't cut?
Bank governor Philip Lowe last month gave a very strong steer that the board would cut this time. In a speech he said that unemployment would not go down with cutting rates and said that “we will consider the case for lower interest rates”.
So far pretty clear cut.
But an article in the Australian Financial Review yesterday set out three possible reasons why the bank might sit tight again today. If you didn’t see the piece, allow me to summarise for you. The first reason is that the bank might think that if it cuts rates it will have no ammunition left to stimulate the economy if it tipsm into recession, which some think is possible later this year. Number two is that unemployment is still not rising high enough to justify a cut; the bank has consistently said that the jobs market has to weaken more in order to justify cuts. The final reason is that the RBA might think that with the Coalition back in power, its tax cuts will provide stimulus enough for the economy.
Stock markets have been tumbling again across the rest of Asia Pacific as the US-China trade/tech/geopilitical standoff continues to rumble on without much propsect of a resolution.
The Nikkei is down 0.6%, Hang Seng is off 0.65%, Shanghai -1% and the Kospi in Seoul is just into the red by a couple of points.
It followed a volatile session on Wall Street which saw the stocks fall on weak factory data. But the Nasdaq dropped by 1.61% to 7,333.02, taking it more than 10% lower than its May 3 closing record, amid concerns that US regulators could target Alphabet, Facebook and Amazon for antitrust violations.
Read the full report hewre:
While the Aussie dollar dipped slightly after those retail figures, the ASX200 has remained flat as investors sit on their hands ahead of the decision at 2.30. The index is up 1.7 points, o.03%, at 6,322.
Writing yesterday before the retail figures, Craig James, chief economist at Commsec Research, said there had been a lot to like about recent economic data. Company profits are at a record high, he says ,sales are growing near the fastest pace in a decade in 12 out of 15 industry sectors and wages are growing at a faster pace than the decade average.
With inflation low, he says the figures mean the RBA can “go for growth” by cutting rates and trying to get more people into work.
Worth highlighting a chart from Greg Jericho’s aforementioned article showing that profits have been rising but wages haven’t kept up:
Retail sales hurt by housing market, economists say
The chances of a cut looked even more likely after this morning’s weak retail sales figures.
The release from the Australian Bureau of Statistics said that retail sales fell 0.1% in April, compared with growth of 0.2% predicted by economists.
Spending on household goods fell by 0.9%, leading economists to make a direct read across to impact from the falling property market. Cafes, restaurant and takeaway food services fell 0.7%; and clothing, footwear and personal accessory retailing dropped by 1.2% for the month. The falls were offset by a 0.2% lift in food retail and a healthy 1.8% rise in department store spending.
The Australian dollar dipped slightly to US69.64c on the news at 11.30am although it has since moved up againto US69.73c.
What the experts say
More or less everyone thinks today will be the day when the cash rate moves into yet more uncharted territory. All four of Australia’s big banks believe that rates will fall today – and probably fall again by the end of the year. The doyen of bank economists, Bill Evans, thinks today will see the first of three rate cuts this year.
JP Morgan goes further and sees the cash rate as low as 0.5% sometime next year.
Westpac’s Matthew Hassan believes a cut is nailed on so focuses on what a reduction in borrowing costs might mean for economic sentiment. He thinks it’s going to be “reasonably positive” and, because it is likely to be the first of several more cuts this year, “the more interesting aspect may be the extent to which a June rate cut and follow up moves in coming months generate a more sustained lift in housing related sentiment”.
Welcome to the live blog on the Reserve Bank of Australia’s board meeting.
It’s widely expected that the board will move the cash rate for the first time since August 2016 with all signs pointing to a 0.25% reduction to 1.25% at 2.30pm today.
Bloomberg says that 36 out of 38 economists polled believe that the RBA will reduce the cash rate from its current 1.5%, itself already a record low.
The chances of a cut have hardened with figure this morning showing that retail sales in Australia fell by 0.1% in April. Forecasts were for the figure to rise 0.2% so that’s what market experts call a big miss on the downside. More analysis of that coming up soon.
We’ll also be looking at whether the banks will pass on a cut to mortgage holders in the event that the RBA does reduce rates. Treasurer Josh Frydenberg said this morning that banks must pass the cut on. More on that too coming up.
This is all part of a big week of economic data for Australia with tomorrow seeing the release of GDP figures for the first three months of the year. For analysis of that and everything else this week you can read this excellent piece by my colleague Greg Jericho:
And to get a little bit topical (apologies to readers in WA and the NT) ...