Reserve Bank interest rates: RBA cuts rates to historic low of 1.25%

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.

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.

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:

https://twitter.com/hidflect/status/1135768170633973763

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.

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.”

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: