Families don't half need big rate cut

| 29.04,12. 04:49 AM |






Families don't half need big rate cut

April 29, 2012

IT'S the much-anticipated rate cut homeowners and retailers desperately need.

Mortgage holders will save hundreds of dollars a year on their repayments when the Reserve Bank cuts interest rates by at least 0.25 percentage points on Tuesday.

And it could not come at a better time with depressed retail conditions, the looming carbon tax, a 16 per cent hike in electricity prices, and warnings next week's federal Budget will be tough as the government works towards a surplus.

In what is expected to be the first of three rate reductions this year, most economists are tipping a cut of 25 basis points, though many argue a cut of 50 basis points is needed to have any real impact.

Treasurer Wayne Swan has warned banks homeowners would react badly if the rate cut was not passed on in full.

AMP chief economist Shane Oliver said a cut was "virtually guaranteed" - the only question was by how much.

"A quarter of a per cent is most likely, given the conservative nature of the Reserve Bank and the lack of a crisis at the moment," Dr Oliver said.

However, he cautioned the big banks would most likely pass on just 0.1 to 0.15 per cent of a 0.25 per cent cut.

"The bottom line is, we really need to see a decent cut in mortgage rates to get the economy moving again," Dr Oliver said.

Aussie Home Loans chairman John Symond urged the Reserve to act decisively and drop its cash rate by 50 basis points "before any further economic rot sets in" (see column left).

Former Reserve Bank board member Warwick McKibbin, who now heads the Australian National University's Research School of Economics, said a 0.25 per cent cut was relatively small and would take six to eight months to filter through the economy.

"That's probably just enough to offset all the current political uncertainty which is undermining confidence," Professor McKibbin said. "If it helps with consumer confidence, it will help retail a bit."

The Reserve last cut rates in November and December but the big banks independently raised their variable mortgage rates last February to compensate higher funding costs amid ongoing European turmoil.

With the UK last week entering its first double-dip recession in 37 years, the focus will be on how big a move Australia's central bank makes this week.

CommSec chief economist Craig James talked up Tuesday's Reserve Bank meeting, saying it would provide a major confidence boost.

"It has the potential to spark a pretty significant recovery in the economy if people's confidence levels do start to pick up," Mr James said.

"It's going to inject some more money into the economy, a bit more confidence into the economy. We are looking ahead to better times."

Damian Smith, the chief executive of financial comparison website RateCity.com.au, said the rate cut would ease financial pressure on many households, as well as benefit struggling retailers.

The big four banks would not commit to passing on any rate cut in full, with the ANZ holding its own monthly meeting on the second Friday of each month.

Customers at ANZ will have to wait until May 11 to see how their rates move.

NAB said it was dedicated to having the lowest variable rate of the major banks.

"We can't pre-empt what the RBA will do, but we can say that NAB will have the lowest standard variable mortgage rates of the big four banks," a spokeswoman said.

Westpac and the Commonwealth Bank said they would not speculate on the Reserve's upcoming decision.

Liam O'Hara, a senior economist for a government department and the director of Reality Economics, said he doubted the banks would pass on a rate cut in full.

"Given they (the banks) haven't been moving in step with the Reserve Bank, then it would be very unlikely that they would do it," Mr O'Hara said. "It certainly won't reflect the full 25 basis point cut."


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