Wednesday May 2, 2012
RBA cuts rate by 50 basis points, twice as much as expected
SYDNEY: Australia's central bank cut interest rates by a surprisingly aggressive half a point yesterday and said inflation would likely be lower than expected for the next two years, leaving the door ajar for further easing if needed.
The Australian dollar fell about three-quarters of a US cent and government bond yields hit 60-year lows as the Reserve Bank of Australia (RBA) cut its cash rate to 3.75%, a level not seen since late 2009. Markets had predicted only a quarter point easing.
Driving the larger move was the need to get mortgage rates down to stimulative levels given local banks have been nudging up their rates to cover higher funding costs. “A reduction of 50 basis points in the cash rate was, in this instance, therefore judged to be necessary in order to deliver the appropriate level of borrowing rates,” RBA governor Glenn Stevens said after the bank's monthly policy meeting.
A move had been widely expected given a background of benign inflation and disappointing economic growth. In a Reuters poll of 22 analysts, 21 had expected a cut of 25 basis points, with another cut for June.
“This 50 basis-point move will lead to a decent reduction in borrowing costs,” said Shane Oliver, chief economist at fund manager AMP Capital. “The economy is not certain to recover just because of this. We will probably see cash rates down to 3.25% by year-end.” Rates are now the lowest since December 2009, but still far above those in the United States, Japan and Europe.
And that's one reason investors are pricing in a further 70 basis points of cuts within a year. If they are right, that would see rates near the record lows of 3% plumbed during the depths of the global financial crisis. - Reuters
Tuesday's easing was greeted warmly by a Labour government that is trailing badly in opinion polls yet is set to deliver a tough budget next week aimed at returning to surplus years before most other developed economies.
“This is the interest rate cut that households and small businesses have been hanging out for,” Treasurer Wayne Swan told a news conference. “It is well deserved and it is certainly much needed by households under financial pressure.”
It also lowered the government's borrowing costs, with yields on 10-year bonds diving to 3.55%, the lowest since the early 1950s. Australian households are highly sensitive to mortgage rates as over a third have home loans, most of which are variable. Mortgage debt totals around A$1.2 trillion, or 1.5 times household disposable income, and paying the annual interest on it takes almost a tenth of those earnings.