RBA Interest Rate Decision May: Rate Cut 0.5%

The Reserve Board at its monthly policy meeting decided to cut the target cash rate by 0.5% to 3.75%.

In a statement by Glenn Stevens on Tuesday he stated:

“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.” [1]

Global Growth Slowdown

The Reserve bank governor noted a slowdown in global growth in the second half of 2011 highlighting continuing difficulties in Europe and weak growth conditions in the US. Another key concern was that funding costs to major banks has remained elevevated above levels seen earlier in 2011.

Funding costs and credit conditions faced by major banks including the big four Australian banks play an important part in the Reserve Bank’s rate setting.

The Australian Economy

Stevens noted that the Australian economy is still below trend growth, partly due to a persistently high exchange rate for the Aussie dollar. Of course the high Australian dollar is partly due to the comparatively higher rate of interest that the RBA has maintained over the course of the past couple of years.

The key variable that the board focuses on, inflation, came in at less than the board’s target rate of 2-3% for the year on year rate in April.

“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.” [1]

What does a rate cut mean for home owners?

The board did note weakness in the housing market over 2011 and expected house prices to remain subdued. They also stated that borrowing costs were not aided by lenders passing on higher costs of funding.

Already we have seen NAB pass on a cut of 32 basis points to mortgage owners. National Australia Bank’s standard variable rate will fall from 7.31 per cent to 6.99 per cent, effective from Friday the 4th of May. [2]

Where to from here?

The key consideration will continue to be inflation data with Stevens stating that “the inflation outlook would provide scope for easier monetary policy, if needed, to support demand”. Continued sub par growth in the Australian economy and weakness in global economic growth over the second half of 2012 combined with an inflation rate within or below the RBA’s target 2-3% target would suggest a further rate cuts to

 

RBA Target Cash Rate May 2012

RBA Target Cash Rate

References

[1] Statement by Glenn Stevens, Governor: Monetary Policy Decision, RBA Media Releases, 1st May 2012

[2] National Australia Bank first major to cut variable mortgage rate, but Treasurer calls it an insult, The Australian, 2nd May 2012

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