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RATE CUT BRINGS RELIEF TO FAMILIES

By Michael McMahon

Delivering the Reserve Bank’s first mid-election campaign rate cut, governor Glenn Stevens said the nation’s economy had been growing more slowly than its long-term trend rate over the past year. “This is expected to continue in the near term as the economy adjusts to lower levels of mining investment. The unemployment rate has edged higher,” he said.

Chris Bowen said the 25-basis-point rate cut to 2.5 per cent would be welcomed by families and businesses who understood that lower interest rates were “a good thing”.

“The Reserve Bank was able to make this decision because inflation remains within the target band, because employment and economic growth remain good by international standards but are slowing compared to the projections of a little while ago,” the Treasurer said.

Coalition Treasury spokesman Joe Hockey said the Reserve Bank would not be cutting rates to 50-year lows if the economy was performing well. “This interest rate cut is about a struggling economy under Kevin Rudd and is not a great credit to this government at all,” he said.

“The concern is we are heading in the wrong direction while the rest of the world is heading in the right direction in relation to economic growth and employment.”

Although it is the Reserve Bank’s first rate cut during an election campaign, it did cut rates the day before Bob Hawke called the 1990 election campaign. At the time, the bank was not independent of government, and stood accused of manipulating rates for political reasons. The last rates move during an election campaign also benefited Mr Rudd when, in November 2007, the fully independent Reserve Bank’s 25-basis-point rise weakened the Coalition’s claim to always deliver lower rates. Mr Rudd beat John Howard to become prime minister three weeks later.

“The Reserve Bank may be criticised for cutting rates during an election campaign, but ultimately it decides what is best for the economy,” Barclays chief economist Kieran Davies said.

It is the Reserve Bank’s eighth rate cut since November 2011, when it became concerned that Australia’s recovery from the global financial crisis was failing to consolidate.

Three of the four major banks immediately announced they would pass on the cut to their mortgage customers, with the National Australia Bank doing so within five minutes of the Reserve Bank’s announcement and Westpac cutting its rates by 28 points. The ANZ is likely to follow the other three majors later this week after its monthly rate committee meeting.

The cut brings standard variable mortgage rates at the major banks down to about 5.95 per cent from their 2011 peak of 7.8 per cent, lowering monthly repayments on a $300,000 mortgage by a total of $350.

An analysis by the ANZ shows standard variable mortgage rates are now at their lowest level since the early 1970s, while the official cash rate is at its lowest point since inflation targeting began in the early 90s.

Mr Stevens gave no indication about the bank’s future intentions, saying only that it would “adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target”.

The Australian dollar rose following his statement, jumping almost US1c to US89.9c as markets had been expecting the bank may flag further rate cuts.

Mr Stevens did not close the door to further cuts, noting that inflation was likely to remain consistent with the Reserve Bank’s target over the next one to two years, even with import costs rising because of the 15 per cent fall in the value of the Australian dollar. He said it would be helpful if the Australian dollar fell further, and the Reserve Bank may be hoping that moves by the US Federal Reserve to start winding down its extraordinary support of the US economy will bring further falls in Australia’s currency.

Mr Stevens said lower rates were boosting interest-sensitive spending and asset prices, with household demand for debt starting to rise.

The Australian Bureau of Statistics yesterday reported that house prices rose by 2.4 per cent in the June quarter, bringing the annual rise to 5.1 per cent.

Mr Stevens has indicated that he would not like to see speculative investment in housing taking off; however, current house price levels are still below their peak in 2010, particularly if inflation is taken into account.

Mr Bowen denied Mr Hockey’s charge that the government was putting all the onus on the Reserve Bank to support the economy, saying the government was doing its bit to help by allowing the budget to run at a larger deficit.

“We’ve realised a budget deficit this year, which is continuing to contribute to stimulus in the economy; and it would be irresponsible not to do so.”

Mr Bowen rejected claims by big business that the government had not done enough to correct the underlying budget deficit.

“I’ve outlined measures to return the budget to surplus in 2016-17; that is a structural improvement to the budget bottom line because it is achieving surplus with reduced terms of trade,” he said.

The Prime Minister said only Labor was addressing cost of living pressures. “What he (Mr Abbott) needs to understand is that all Australian families, working families in particular, are under cost of living pressure,” Mr Rudd said. “Through the independent decision of the RBA we have interest rates low by historical standards.”

Former RBA board member Warwick McKibbin said last night the government had left the RBA with no choice but to cut interest rates. The Australian National University economist told the ABC’s Lateline that “policies that should have been followed haven’t been”. “(The rate cut) was an indication the economy is weak,” he said. “It’s really now down to the Reserve Bank to try and keep things together.”

After the rate cut, Mr Abbott abandoned the Liberal Party’s mantra that interest rates would always be lower under a Coalition government.

The economy will remain in focus over the rest of the campaign. Job figures for July will be released tomorrow and the Reserve Bank will update its forecasts for the economy in its quarterly review on Friday.

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