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Reserve Bank Cuts Cash Rate By 0.25%

The Reserve Bank has cut the cash by another 0.25%.

The reduction follows the 0.5% cut last month. The cash rate is now 3.50%.

Statement by Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 3.50 per cent, effective 6 June 2012.

Growth in the world economy picked up in the early months of 2012, having slowed in the second half of 2011. But more recent indicators suggest further weakening in Europe and some further moderation in growth in China. Conditions in other parts of Asia have largely recovered from the effects of last year’s natural disasters, but the ongoing trend is unclear and could be dampened by slower Chinese growth. The United States continues to grow at a moderate pace. Commodity prices have declined lately, though they are mostly still high. Australia’s terms of trade similarly peaked about six months ago, though they remain historically high.

Financial market sentiment has deteriorated over the past month. The Board has noted previously that Europe would remain a potential source of adverse shocks. Europe’s economic and financial prospects have again been clouded by weakening growth, heightened political uncertainty and concerns about fiscal sustainability and the strength of some banks. Capital markets remain open to corporations and well-rated banks, but spreads have increased. Long-term interest rates faced by highly rated sovereigns, including Australia, have fallen to exceptionally low levels. Share markets have declined.

In Australia, available indicators suggest modest growth continued in the first part of 2012, with significant variation across sectors. Overall labour market conditions firmed a little, notwithstanding job shedding in some industries, and the rate of unemployment remains low. Nonetheless, both households and businesses continue to exhibit a degree of precautionary behaviour, which may continue in the near term.

There have been no new data for inflation since the previous meeting. Over the coming one to two years, and abstracting from the effects of the carbon price, inflation is expected to be in the 2–3 per cent range. In the near term, it is likely to be in the lower part of that range, though maintaining low inflation over the longer term will require growth in domestic costs to slow as the effects of the earlier high exchange rate wane.

As a result of earlier changes to monetary policy, interest rates for borrowers have declined to be a little below their medium-term averages. Business credit has increased more strongly in recent months, though credit growth remains modest overall. Housing prices had shown some signs of stabilising around the turn of the year, but have recently declined again. Generally, the housing market remains subdued. The exchange rate has declined over recent weeks, reflecting lower commodity prices, heightened risk aversion and expectations of lower interest rates.

At today’s meeting, the Board judged that, with modest domestic growth and a weaker and more uncertain international environment, the outlook for inflation afforded scope for a more accommodative stance of monetary policy.

Transcript of Treasurer Wayne Swan’s press conference.

  • Listen to the press conference (11m)

TREASURER: Today’s interest rate cut will be welcomed by Australian families and businesses that work hard to make our economy strong, and it will be another boost to households along with the additional cash which has been posted to their accounts now. So I think it’s a welcome decision, it’s a win for households and it’s a dividend of returning our budget to surplus.

What this means is, say for a household with a $300,000 mortgage, they’re now paying something like $3,500 a year less in mortgage repayments than they were when the Liberals were last in office. As I said before this adds to additional relief which is going to households from measures like the Schoolkids Bonus.

Now the five interest rate cuts that we have seen have all been made possible by our disciplined approach to the budget. I think the announcement today from the Reserve Bank gives Australians confidence that the Reserve Bank has further room to move, and of course a big part of that flexibility is the return of our budget to surplus.

Now of course this is in stark contrast to what occurred under the Liberals where we saw something like 10 interest rate rises in a row. Today, the cash rate at 3.5 per cent is lower than at any time under the Liberal Government and 325 basis points lower than when they were last in office.

Now bringing the budget back to surplus is what gives the Reserve Bank the maximum flexibility to adjust rates and to take its decisions independently of the government. Now we are delivering a surplus in 2012-13, it’s appropriate to do that when you have an economy growing at trend, it’s imperative to send a very clear message of confidence to the world, particularly given the volatility we are seeing in global markets. And of course returning to surplus means that the government is not adding to price pressures in the economy, particularly at a time when we have such a huge pipeline of investment in the resources sector. Now all of this is occurring in the context of the government having a AAA credit rating from the three major rating agencies, this is the first time this has occurred in our history, and it’s not something that occurred when the Liberals were last in power.

So the point I want to make is our economic fundamentals are strong, we’ve got solid growth, there’s been over three quarters of a million jobs in Australia created under this government, we’ve got a very strong investment pipeline, all of these things I think mean Australia can be confident about the future, particularly in the midst of global volatility.

JOURNALIST: Treasurer, you said this was a win for households if the major banks pass it on, they didn’t heed you’re warning last month, what makes you think they’re going to do it this time?

TREASURER: Well I certainly don’t accept the advice that has been given by Mr Hockey and Mr Robb that it’s ok for the banks to pocket some of this interest rate cut. It certainly is not from my point of view. The fact is that the banks are very profitable, their net interest margins are around the levels that they were prior to the global financial crisis. So, I think that their customers will not treat them kindly if they do not pass this through in full. I think their customers will be very angry and that is one of the reasons why I’ve spent considerable time putting in place a whole range of measures to put additional competition into our banking system. And you can already see the smaller banks and the credit unions have been growing their loan books at the expense of the bigger banks. They’ve been doing a lot better, it is easier to walk down the road and get a better deal, so there’s a competitive environment out there and if people are unhappy with the response of their financial institution they can get a better deal down the road.

JOURNALIST: Treasurer, will the rate rise work as intended if those major banks have the major share of home loan customers and don’t pass it on as intended?

TREASURER: Let’s not put the cart before the horse here and let’s also look at where we are. We’ve had in terms of the official cash rate, 50 basis points at the end of last year, another 50 basis points so far this year, another 25 basis points today. There’s a fair bit of monetary policy loosening going on in the system and of course from my perspective the more that is passed through to households the better. The better for the economy, the better for the households, and as I’ve said before, we do have a healthy banking sector, that’s a good thing for Australia, but the thing is our banks are extremely profitable, very profitable in terms of their return on equity, certainly among their peers they are amongst the top in the world and when it comes to net interest margins, their net interest margins are back to where they were prior to the global financial crisis. All of those things I think indicate that they should be passing it through, but if they don’t what I say is their customers do have the capacity to get a better deal and increasingly customers are doing precisely that.

JOURNALIST: Isn’t there a bit of a problem for you and for the economy Treasurer, the Reserve Bank’s statement talks about precautionary (inaudible) and what consumers are doing. You just mentioned the impact, 50 basis points plus 25 today this year (inaudible), is that going to be a problem for the budget (inaudible).

TREASURER: Well I think that’s why it’s important that Australians understand that the Australian economy is strong compared to the rest of the world, it’s important that Australians understand that we’ve already factored into our budget forecasts a recession in Europe, three quarters of one per cent is factored into the budget for a contraction in growth in Europe.

So, I know that as Australians watch these events unfold overseas, they get the impression that all of these things are happening in their backyard and perhaps in their economy, but our economy remains strong, we are not immune from these events, but I think Australians can have confidence for example here with monetary policy unlike most other countries there is great, great scope for the deployment of monetary policy in our economy to stimulate our economy. Great scope for that and we’re seeing the Reserve Bank provide additional help and assistance through monetary policy.

If you go to any country in Europe, they’re in what they call a liquidity trap, they haven’t got the capacity to deploy monetary policy. So we have great capacity here in terms of public policy to respond to these events, but here, we have growth around trend, we are going to outperform in the next two years every major advanced economy, on top of that a huge investment pipeline in resources and getting back to your initial point we still have solid consumption which proves Australians are saving more. But it is also true that they haven’t entirely stopped putting their hands in their pockets. Australians are still eating out, Australians are still going out and doing many of the things they normally do, but they’re not doing some of the things they used to do prior to the global financial crisis and they are being a bit more conservative and they’re saving a bit more.

But the one thing about this decision today when it is combined with the previous rate cut is that it does put extra cash in the pockets of people with mortgages, it puts extra cash in the pockets of many people in small business and it’s up to them to then decide what they’ll do with that. Will they invest it, will they save it, that is the decision that they take, but Australians can take those decisions confident in the knowledge that they’re in one of the strongest economies in the developed world.

JOURNALIST: Treasurer, you talked a lot about international developments and the Reserve Bank (inaudible) and what’s happening overseas. What’s your message to the G20 about what’s going on in Europe and the future for Greece? Do you think there should be more stimulus from Germany and are you taking part in the phone hook- up, the G20 phone hook-up today to discuss these meetings?

TREASURER: I’ve been involved in a number of discussions with international counterparts over the past weekend; we’ll be involved in further discussions with international counterparts over the next 24 hours. There’s no formal discussion that I’m involved in, but I have been involved on a bilateral basis talking not only to fellow finance ministers, but also to others in international financial organisations. So I’m doing all of those things, what I will say most particularly about what’s going on in Europe is that it’s very disappointing that the European authorities have been so slow to act if you like, given this recent bout of instability. And from my part, and I know from a number of my colleagues would like to see more decisive action from our counterparts in Europe. It’s not as if the problems are not well known, it’s not as if the solutions are not well known, what is required in Europe is the political will to act.

JOURNALIST: Treasurer, the Reserve Bank refers to the (inaudible) that’s become apparent over the last four weeks that has also been one of the main factors depressing share markets in Australia and resource stocks there. Does the emerging weakness in the Chinese economy have implications for the Australian budget?

TREASURER: I’m confident that our forecasts for Chinese growth are accurate. There is a lot of commentary as you well know being such an expert in the field, a lot of commentary about what is happening in the Chinese economy. I myself am confident that there, whilst there is a slowing which is being induced in the first instance by the tightening of monetary policy and there is some impact on the Chinese economy of what is happening in Europe, that it will continue to grow at a reasonable healthy pace, and that will be good for the region.

I’d also make the comment that the rest of our region is still in reasonably good nick as well. Having said all of that, ultimately we’re not completely immune from events in Europe, but we are in the best part of the world at the right time, and that’s a good thing for us.


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Malcolm Farnsworth
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