RBA Cuts Interest by 25 Basis Points to 3.5%

As expected by economists and analysts, the Reserve Bank of Australia (RBA) cut on Tuesday the overnight cash rate by 25 basis points to 3.5 per cent. The move aims to pre-empt the possible repercussions of the uncertainty if Greece will leave the Eurozone and weakness of the Chinese an American economies.

"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," the RBA said in a statement.

"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," the RBA said.

Macquarie senior economist Brian Redican took the RBA to task for issuing a bland statement which focused on conditions in the world market but hardly touched on the weaknesses in the Aussie economy.

"They haven't pointed to anything worrying in the domestic economy, so it appears that this is a precautionary rate cut designed to instill confidence in the economy when financial markets and the rest of the world are looking quite threatening," The Sydney Morning Herald quoted Mr Redican.

City Index chief market analyst Peter Esho said the rate cut is an admission of RBA's slowness to respond to worsening global environment that resurfaced in 2011. He added the rate cut would have little effect on the Aussie economy.

"We see little impact going forward with this 25 basis point cut - banks will gouge more margin and pass some through to customers. In fact the recent fall in oil prices will probably do more to help stimulate discretionary spending when taken across the whole economy," The Australian quoted Mr Esho.

The 3.5 per cent overnight cash rate is the lowest level since November 2009.

All eyes are now on Australian banks if it will pass in full any rate reduction. With the much-awaited RBA decision out, the bigger question in the minds of many Australian borrowers is if the lenders would pass in full any rate cut or keep part of it as they did in May.

The RBA cut interest rates in May by 50 basis points to bring the rate down to 3.25 per cent. However, 85 per cent of the lenders kept an average of 18 basis points then and passed only 32 basis points. Only three lenders passed in full the May rate cut, these are Defence Bank, Unicredit and Macarthur Credit Union.

As a result of the banks keeping a part of the rate cut, borrowers are paying 3.3 percentage points above the official cash rate for their home loans. Observers pointed out that it is higher than the rate they were paying during the global financial crisis.

Ahead of the RBA announcement, Australian Bankers' Association Chief Executive Steven Muncheberg explained there is no longer a one-to-one relationship between the RBA rate and mortgage rates. He attributed it to instability in the financial markets, while banks pointed to the higher cost of money they borrow overseas.

The spokeswoman of comparison Web site RateCity, Michelle Hutchison, placed a decent chance for a 25-basis points cut by the RBA, but added the banks would likely not pass the rate cut in full. She, however, questioned such a likely move given the banks' earnings.

"I can understand that funding models can change, but we have seen rising profits by the big banks and we have also seen their ability to be nimble when it works for them and slow when it works for the consumer," Courier Mail quoted Ms Hutchison.

Ingrid Just, the spokeswoman of consumer group Choice joined Ms Hutchison in calling on the banks to pass in full the 25 basis points rate cut to borrowers.

"The banks are hugely profitable and, given our economic conditions, it is only fait they pass on any rate cut in full," The Sydney Morning Herald quoted Ms Just.

So far, the Bank of Queensland has announced it will cut by 20 basis points its standard variable rate to 6.91 per cent beginning June 16.