As expected the Reserve Bank has cut interest rates to a historic low of 1.5%, cutting the cash rate from the previous low of 1.75% set at the May meeting of the bank’s board.
But the major banks failed to pass on the full 0.25% cut, as many analysts had forecast they wouldn’t as they try to maintain earnings.
The post meeting statement issued by Governor Glenn Stevens (his second last) referred to continuing low inflation (as we saw in the June quarter Consumer Price Inflation report) weak wages and a slowing in business lending in recent months.
After again outlining a series of comments about the state of the Australian and global economies, and the weakness of inflation pressures and costs, and how the bank thought another rate cut would not boost property prices,
"In Australia, recent data suggest that overall growth is continuing at a moderate pace, despite a very large decline in business investment. Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend. Labour market indicators continue to be somewhat mixed, but are consistent with a modest pace of expansion in employment in the near term,” Mr Stevens said in yesterday’s statement.
"Recent data confirm that inflation remains quite low. Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time.
"Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 is helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes. These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.
"Supervisory measures have strengthened lending standards in the housing market. Separately, a number of lenders are also taking a more cautious attitude to lending in certain segments. The most recent information suggests that dwelling prices have been rising only moderately over the course of this year, with considerable supply of apartments scheduled to come on stream over the next couple of years, particularly in the eastern capital cities.
"Growth in lending for housing purposes has slowed a little this year. All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished,” the statement said.
Mr Stevens said in the final para of yesterday’s statement:
“Taking all these considerations into account, the Board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting.”
Any further rate cuts (which many economists still reckon will happen), are now in never never land. The RBA’s statement dropped any reference to further moves (that was suggested in the final para of the July statement).
That final paragraph from yesterday’s statement represents a significant change from the final paragraph of the July statement (besides the rate cut decision).
"Taking account of the available information, the Board judged that holding monetary policy steady would be prudent at this meeting. Over the period ahead, further information should allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate.”
Tuesday’s board meeting was governor Glenn Stevens’ second last. He will be succeeded on September 18 by his deputy, Philip Lowe. He will have an opportunity to expand on the reasons for the cut on Friday in the third quarterly statement on monetary policy and next Tuesday will see his final address as governor to business economists in Sydney at a charity lunch he has long supported.
And as expected the banks have not passed the rate cut on in full – the CBA only cut rates by 0.13$ for home loans and business customers on variable rate products. But the CBA lifted its one, two and three year deposit rates by 0.55 and 0.50%.
And the NAB was even stingier – it cuts its variable home loan and business rates by 0.10%, but also lifted one of its deposit rates by 0.80% (for just eight months).
The ANZ and Westpac also cut less than the 0.25%, but boosted some of their deposit rates.
But the impact on people on fixed incomes is again the big downside from the latest rate cut.
The AMP’s Chief Economist, Dr Shane Oliver wrote last night:
"For investors relying on bank interest, the decision by the RBA to cut the cash rate is not good news. That said competitive pressures have seen some banks raise their deposit rates a bit lately. The trouble is that the they are still very low.
"Beyond day to day cash requirements, the key for investors currently in cash or term deposits is to work out what is most important to them: absolute certainty regarding the capital value of their investment or obtaining access to a higher more stable income flow at the cost of volatility in the value of their investment.
“In this, there are several alternative investments to cash, including shares offering high and sustainable dividend yields, commercial property, corporate debt and infrastructure investments,” Dr Oliver wrote.
