The Experts

Reasons for the December rate cut

by Glenn Baker

ING DIRECT has announced it will decrease its variable mortgage rates by 0.25 per cent.

What were the main reasons behind the RBA's rate decision today?

The RBA didn’t point to any specific drivers for the decision. If anything they expressed expectation that earlier actions were still working their way through the economy and would have a positive effect. This move looks like a little bit more insurance to help foster sustainable growth.

Do we need to see more rate cuts over the next year to improve business and consumer confidence?

There has been a significant amount of monetary stimulus injected into the economy since November 2011 by way of rate cuts now totalling 1.75 per cent. The RBA can be expected to be watchful for a while, but if confidence and economic activity do not lift it is possible that further rate cuts could occur. The RBA comments however imply we could be near the end of this easing cycle.

Will the banks pass on this cut? Why or why not?

Individual banks will assess their position relative to their cost of funds and lending margins. Recent reductions in the costs of new deposits and wholesale borrowings are starting to reduce the funding cost pressures. Whilst the funding cost issue is far from resolved it is likely that more of the rate cut could be passed through to borrowers on this occasion.

What effect will today's rate decision have on the Australian dollar?

The rate cut has initially had negligible impact on the currency. The easing was largely expected and priced into the exchange rate.

What is your outlook for the economy?

The economy was softening on a number of fronts but it is basically on a fairly solid growth footing. This additional cut in rates should add a bit more confidence and as the RBA suggests help sustain further growth.

Published: Tuesday, December 04, 2012

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