The Adviser

 

ECONOMY - Pundits eye more downward rate movements

Benign inflationary growth, a slow rise in employment, and low consumer confidence prompted the Reserve Bank to cut rates at its November Board meeting

FOR THE second consecutive year, the Reserve Bank (RBA) managed to upstage the race that stops the nation.

Last year, the RBA angered home owners and corporate borrowers when it lifted the official cash rate by 25 basis points.

This year, the story was a little different.

The Bank gave borrowers a reason to celebrate the Melbourne Cup, cutting rates for the first time in more than two and a half years.

Westpac’s chief economist Bill Evans was among the first to predict the RBA would choose to cut. He continues to predict the central bank will chop 100 basis points over the cycle, trimming them to 3.75 per cent.

“We continue to expect that the next cut will come in February after the Bank gets further evidence on inflation and has time to assess the impact of this move,” Mr Evans says.

He noted that the RBA described a 4.5 per cent cash rate as “more neutral” rather than “neutral”.

“The [RBA] Governor correctly continues to describe overall financial conditions as tighter than normal, recognising weak credit growth and falling house prices,” he says.

“There is also a much less upbeat description of the external sector.

“China is now described as having slowed, commodity prices are now recognised as having ‘generally declined’ and global trade is now recognised as being affected by the slowdown in Europe.”

Three of the four majors passed on November’s 25 basis point rate reduction in full to their borrowers.

ANZ, Westpac and CBA subsequently boasted new rates of 7.55, 7.61 and 7.56 per cent respectively.

National Australia Bank passed on just a 0.2 per cent rate cut to borrowers although the bank still has the lowest standard variable rate of all the majors.

The lender’s new rate sits at just 7.47 per cent – significantly lower than its nearest competitor, ANZ.

While the banks were all happy to pass on some, if not all of the rate cut to their borrowers in November, it will be interesting to see what they choose to do if the Reserve Bank decides to cut rates again.

Already economists are pencilling in additional downward rate movements early in the New Year.

The Commonwealth Bank of Australia’s senior economist Michael Workman is confident there are more rate cuts on the horizon, refusing to depict November’s rate announcement as a “on off move”.

“They’re saying, in their reading of it, that it could be some time before all these concerns about the European situation can be finalised and they believe that, in the meantime, there could be a period of more conservative spending behaviour by firms and households,” Mr Workman says.

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