The Reserve Bank of Australia has cut the cash rate by 50 basis points, or 0.5%, to 3.75%.
The decision, predicted last night by former RBA Governor Bernie Fraser, takes interest rates back to where they were in December 2009.
Treasurer Wayne Swan, Shadow Treasurer Joe Hockey and Australian Chamber of Commerce and Industry Chief Executive Peter Anderson have all commented on the rates decision.
- Listen to Treasurer Wayne Swan’s press conference (12m) – transcript below
- Listen to Shadow Treasurer Joe Hockey’s media conference (5m)
- Listen to Peter Anderson’s media conference (6m)
- Table of interest rate changes since 1990
Text of statement by RBA Governor Glenn Stevens.
At its meeting today, the Board decided to lower the cash rate by 50 basis points to 3.75 per cent, effective 2 May 2012. This decision is based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected, while inflation has moderated.
Growth in the world economy slowed in the second half of 2011, and is likely to continue at a below-trend pace this year. A deep downturn is not occurring at this stage, however, and in fact some forecasters have recently revised upwards their global growth outlook. Growth in China has moderated, as was intended, and is likely to remain at a more measured and sustainable pace in the future. Conditions in other parts of Asia softened in 2011, partly due to natural disasters, but have recently shown some tentative signs of improving. Among the major countries, conditions in Europe remain very difficult, while the United States continues to grow at a moderate pace. Commodity prices have been little changed, at levels below recent peaks but which are nonetheless still quite high. Australia’s terms of trade similarly peaked about six months ago, though they too remain high.
Financial market sentiment has generally improved this year, and capital markets are supplying funding to corporations and well-rated banks. At the margin, wholesale funding costs have declined over recent months, though they remain higher, relative to benchmark rates, than in mid 2011. Market sentiment remains skittish, however, and the tasks of putting European banks and sovereigns onto a sound footing for the longer term, and of improving Europe’s growth prospects, remain large. Hence Europe will remain a potential source of adverse shocks for some time yet.
In Australia, output growth was somewhat below trend over the past year, notwithstanding that growth in domestic demand ran at its fastest pace for four years. Output growth was affected in part by temporary factors, but also by the persistently high exchange rate. Considerable structural change is also occurring in the economy. Labour market conditions softened during 2011, though the rate of unemployment has so far remained little changed at a low level.
Recent data for inflation show that after a pick up in the first half of last year, underlying inflation has declined again, and was a little over 2 per cent over the latest four quarters. CPI inflation has also declined, from about 3½ per cent to a little over 1½ per cent at the latest reading, as the weather-driven rises in food prices in the first half of last year have, as expected, now been fully reversed. Over the coming one to two years, and abstracting from the effects of the carbon price, inflation will probably be lower than earlier expected, but still in the 2–3 per cent range.
As a result of changes to monetary policy late last year, interest rates for borrowers have been close to their medium-term averages over recent months, albeit tending to increase a little as lenders passed on the higher costs of funding their books. Credit growth remains modest overall. Housing prices have shown some signs of stabilising recently, after having declined for most of 2011, but generally the housing market remains subdued. The exchange rate remains high even though the terms of trade have declined somewhat.
Since it last changed the cash rate in December, the Board has maintained the view that the setting of policy was appropriate for the time being, but that the inflation outlook would provide scope for easier monetary policy, if needed, to support demand. The accretion of evidence over recent months suggests that it is now appropriate for a further step in that direction.
In considering the appropriate size of adjustment to the cash rate at today’s meeting, the Board judged it desirable that financial conditions now be easier than those which had prevailed in December. 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.
Transcript of Treasurer Wayne Swan’s press conference.
- Listen Swan’s press conference (12m)
Today the Reserve Bank cut the official cash rate by 50 basis points. This is the interest rate cut that households and small businesses have been hanging out for. It’s something they’ve waited a while for. It’s very welcome. It is well deserved and it is certainly much needed by households under financial pressure.
Now, combine the two rate cuts last year, a family on a $300,000 standard variable rate mortgage is now paying more than $3,000 a year less in repayments than when the Liberals left office. Today at 3.75 per cent, the Reserve Bank’s cash rate is lower than it was at any time under the last Liberal government, and 300 basis points lower than when the Liberals left office.
Today’s interest rate cut and the two before it, have been made possible by disciplined fiscal policy delivered by this Government. A responsible approach to the budget and disciplined fiscal policy is very, very important given the economic circumstances in which Australia finds itself and given global uncertainty. So obviously it would not have happened if we didn’t have the right economic strategy and contained inflation.
Delivering a surplus in 2012-13 is appropriate for an economy returning to trend growth and is imperative given global economic challenges. Returning to surplus ensures the Government is not generating price pressures in the economy and it does give the Reserve Bank of Australia maximum flexibility to cut interest rates if they think that is appropriate, but of course they do take those decisions independently of the Government.
So today at 3.75 per cent, the Reserve Bank’s cash rate is a full 300 basis points lower than it was when the Liberals left office and nobody can forget the fact that interest rates went up 10 times in a row under the last Liberal government when they didn’t pay attention to disciplined economic policy and did not invest in infrastructure.
So returning a budget to surplus is an economic imperative in the circumstances in which we find ourselves. It is the Australia’s best defence in a global economy that is changing dramatically and it certainly does send a very clear message to international markets that this country is committed to responsible fiscal policy. And of course, it is our credible approach to fiscal policy that has been responsible for the fact that we have the AAA credit rating from all three of the global rating agencies for the first time in our history.
Now, of course global turbulence and revisions downwards to revenue will make it more difficult to return to surplus in 2012-13 but we’re certainly determined to get there and we will. But delivering a surplus is not just about Australia’s international reputation or the fact that we are a stand-out performer among developed economies. It’s about recognising that families sitting around the kitchen table trying to pay the bills and bring up their kids are under financial pressure. It’s about ensuring that we can do everything possible to make sure that the RBA has the flexibility to cut rates if it thinks it’s necessary as it did today.
Treasurer, you’re clearly very proud of these low interest rates but the majority of Australians have their home loans with one of the big four banks. They can’t go to the Reserve Bank to get a loan. Should the big four banks all cut their interest rates by 50 basis points and what will you do if they do not?
My view here is very clear and I’ve expressed it consistently here and publicly, and I’ve expressed it consistently to all of those involved and it is this: the banks are very profitable. The banks have the capacity to pass through, given the fact that they are very profitable, and the fact is that if Australians are unhappy with their bank or the approach of their bank in these circumstances, they should walk down the road and get a better deal because there are certainly better deals available. I think their customers will be very, very angry with them if they do not pass through this rate cut…
…All of it?
They will be very angry and will expect the rate cut passed through…
Well, they’ll expect that. Consumers will certainly expect that. Consumers will expect that, but the fact is that if they are unhappy with their financial institution, people can go down the road and get a better deal and indeed they have been doing so. Since the abolition of mortgage exit fees, hundreds of thousands of Australians have moved their financial institutions, more are contemplating it. People do have the capacity to go elsewhere if they’re not happy with their financial institution.
But let’s be very clear here. This is a 50 basis point cut. It is of significant benefit, not just to households and people with home loans, but to small business as well, and everyone out there has been hanging out for this rate cut. It is here, it is welcome, and people do want to experience it in their pocket.
Treasurer, was the Reserve Bank’s decision informed by any briefing from the Government about what would be in next week’s budget? You’re taking some credit for the budget strategy. Or are they just presuming, are you thinking that they have made this decision on the presumption that you will return to surplus?
They take their decisions independently but they will take into account all of the circumstances in the economy, including the approach of the Government to fiscal policy. The Government has been very clear about our approach to fiscal policy. About our determination to bring the budget back to surplus in 2012-13 to send a message to international markets, to send a message to the world and we’ve been very clear that we are very keen to give the Reserve Bank maximum flexibility by not adding to price pressures in the economy. As the Reserve Bank said in its last set of minutes, it was going to look very closely at the inflation rate. That number came out a week ago and of course they would take into account the overall growth outlook and the stance of the Federal Government in taking their decision.
Treasurer, doesn’t that suggest that the Reserve Bank has made a very big cut, that it’s worried that the budget may (inaudible) the economy?
Not at all. I don’t know how we could turn this story, which is a very good story for Australia, on its head like that. And I’ll just refer you to the Reserve Bank minutes because I think they go through their assessment of the economy and it is not in any way vastly different from the Government’s assessment of the economy. The Government’s assessment of the economy is that we are returning to trend growth. We are doing that in an environment where there was some weakness in the global economy at the end of last year. Temporary weakness in our economy at the end of last year, structural pressures unfolding in our economy, particularly the higher dollar, all of those things are impacting in a patchwork economy. They are looking at the same data and the same economic assessments that we are looking at and they have provided their reasons for the cut. So what we have done through fiscal policy is provide maximum flexibility for the Reserve Bank to act on rates, should it decide to do so today, and today it has done so.
Given the structural problems in the economy, particularly the two-speed economy, is one of the good results this decision that the Australian dollar has already fallen half a US cent?
I don’t comment on movements in the Australian dollar Laura, but there’s no doubt that one of the structural pressures on the Australian economy has been the level of the dollar and it has impacted on the tourist sector, it has impacted on the manufacturing sector and of course in terms of our policy making it has been the focus of our attention.
We have an economy which is in transition which is why the Government is so determined to provide significant tax relief for 2.7 million small businesses, to boost the superannuation savings of workers and generally to do everything we possibly can to assist Australians not just to be in work, but with the cost of living pressures which impact upon them every day.
Treasurer, the Reserve Bank says that both the world economy and the domestic economy are growing below trend. Does that raise a question over your confidence that it will return to trend in (inaudible)?
Not at all. If you have a look at the Reserve Bank statement it talks about some weakness in the economy due to temporary factors, particularly at the end I think, of last year and it refers to the exchange rate. These are factors that we are all taking into account in our forecasts. We are forecasting an economy returning to trend growth. I don’t think there’s any great gap between what the Government is saying there and what the Reserve Bank is saying.
It also said the economic conditions have been somewhat weaker than expected. So it is concerned about the…
Well, I think we had a discussion in this room when the December quarter national accounts came out about that very fact.
Will the budget give you room, or will the budget create room for the banks to cut further beyond this, should they decide to do so? Sorry, will the budget create room for the Reserve Bank to cut further, should it decide to do so?
Well, the Government has made it very clear through our disciplined fiscal policy that we take it seriously, that we want to bring the budget back to surplus, and continue to build surpluses after that.
Will it create more room for the Reserve Bank to do more?
That will be a matter for the Reserve Bank at the time and it’s assessment of all the other factors in the economy as well, including the inflation rate.
The National Times is reporting that Christopher Pyne had a discussion and a drink with Mr Ashby about a month before Mr Ashby’s claims, federal court claims. Do you see this as further evidence, or evidence for your claim, to the Government’s claim that (inaudible) so far that the Coalition was involved in those…
Well, I think when you’ve listened to Mr Abbott’s slippery answers about these questions, he has not answered the question of whether he had any knowledge of the Ashby claim. I don’t think he’s fully answered that question at all. He has not answered the question about what role any of his staff may have played in the events that have unfolded. I think he needs to answer that question fully.
I think Mr Pyne has many questions to answer. Did he phone Mr Ashby after he requested his telephone number? Is he prepared to provide his phone records and make those public if he hasn’t phoned Mr Ashby?
Do you think he should?
Well, I certainly think he should. I think the same standard that is being applied to Mr Slipper ought to be applied to the Opposition. Let’s see some consistency from them. They’ve had plenty to say about this. Let’s see them answer a few of these questions.