RBA cuts interest rates by 25 basis points for May

May 7, 2013, 2:30 pmYahoo7

The Reserve Bank of Australia has cut the interest rate by 25 basis points to a 2.75 per cent - lowest in 50 years.

Heeding the distress call of Australian retailers, the Reserve Bank of Australia has cut the interest rate by 0.25 percentage points to 2.75 per cent - the lowest level in five decades.

Related: How to take advantage of a rate cut

Retail sales fell 0.4 per cent in March, with household goods and clothing retailers suffering the biggest declines, according to figures released by the Australian Bureau of Statistics on Monday.

NAB passes on rate cut in full

Despite the relief to retail sector, RBA’s move comes as a surprise given all the 13 economists surveyed by AAP predicted the rates to stay on hold, at least this time around.

While sales were down for March, in volume terms they were up 2.2 per cent in the first quarter of the year, the fastest rise in six years, according to Bureau of Statistics data.

General expectations of rate cuts grew in the past month following a rise in the unemployment rate and disappointing home building approvals figures, as well as news inflation was under control.

Inflation remained subdued, rising 0.3 per cent in April, as the prices of fruits and vegetables rose while petrol prices fell, a private gauge found.

While the Reserve expects unemployment to gradually tick up towards 5.75 per cent this year, the current level - 5.6 per cent - is already close to that.

National Australia Bank senior economist David de Garis said earlier the RBA would do more to stimulate the economy this year and said he was expecting two rate cuts by December.

Also read: Businesses raise need for rate cut

"There's quite a lot of water to flow under the bridge before June, it doesn't sound like they are in a super hurry right now so they might be inclined to hold off for another month," he said.

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What will the banks do and how do you benefit?

If passed on in full by retail banks, the cut will take the average standard variable mortgage rate down to around 6.2 per cent, which is still higher than the 5.75 per cent low seen during the peak of the global financial crisis in 2009.

CommSec's figures show the record low standard variable home loan rate was 5 per cent in May 1964.

A 25-basis-point reduction will take just under $50 a month from the repayments on a $300,000 loan on a 25-year term.

The homebuyer with an average sized $300,000 mortgage stands to benefit about $49 a month, that is if the banks pass the rate cut on in full.

House prices up slightly in March qtr

Australian house prices rose in the first three months of 2013 - but not by much.

Figures released by the Australian Bureau of Statistics show house prices rose 0.1 per cent across the eight capital cities in the March quarter.

That was well below the 1.8 per cent rise economists had forecast and the 2.8 per cent rise recorded by property research firm RP data over the same period.

Soros shorting the Aussie dollar?

Rumours swirled around markets yesterday evening that billionaire US investor George Soros may have taken a $1 billion short position against the currency - Mr Soros famously profited from successfully shorting the British pound early in the 1990s, despite attempts by the Bank of England to prop the currency up.

The Australian dollar fell from around 102.9 US cents when Australian markets wrapped up trade yesterday afternoon to a low around 102.2 overnight, before bouncing back to 102.5 US cents by 9:18am (AEST.

However, the Commonwealth Bank's chief currency strategist, Richard Grace, says a billion dollars is actually small change compared to the size of the market for Australian dollars.

"The average daily turnover for the Australian dollar is $250 billion per day, so I think a $1 billion short position is not something that would draw too much alarm out of market participants," he told ABC News Online.

Governor's statement

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 2.75 per cent, effective 8 May 2013.

The global economy is likely to record growth a little below trend this year, before picking up next year. Among the major regions, the United States continues on a path of moderate expansion and China's growth is running at a more sustainable, but still robust, pace. Japan has announced significant new policy initiatives aimed at strengthening demand and ending deflation. The euro area remains in recession.

Commodity prices have moderated a little in recent months though they remain high by historical standards.

Financial conditions internationally continue to be very accommodative, with risk spreads reduced, funding conditions for most financial institutions improved and borrowing costs for well-rated corporates and sovereigns exceptionally low.

Growth in Australia was close to trend in 2012 overall, but was a bit below trend in the second half of the year, and this appears to have continued into 2013. Employment has continued to grow but more slowly than the labour force, so that the rate of unemployment has increased a little, though it remains relatively low.

Related: How to take advantage of a rate cut

With the peak in the level of resources sector investment likely to occur this year, there is scope for other areas of demand to grow more strongly over the next couple of years.

There has been a strengthening in consumption and a modest firming in dwelling investment, and prospects are for some increase in business investment outside the resources sector over the next year. Exports of raw materials are increasing as increased capacity comes on stream.

These developments, some of which have been assisted by the reductions in interest rates that began 18 months ago, will all be helpful in sustaining growth.

Recent data on prices confirm that inflation is consistent with the target and, if anything, a little lower than expected. The CPI rose by 2½ per cent over the past year, and measures of underlying inflation gave a broadly similar outcome.

These results have been pushed up a little by the impact of the carbon price. Growth of labour costs has moderated slightly over recent quarters while productivity growth appears to be improving. This should help to lessen increases in prices for non-tradables.

The Bank's forecast remains that inflation over the next one to two years will be consistent with the target.

Over recent meetings, the Board has noted that interest rates have already been reduced substantially, with borrowing rates approaching previous lows, and that the effects of this on the economy are continuing to emerge. Savers have been changing their portfolios towards assets with higher expected returns, asset values have risen and some interest-sensitive areas of spending have increased.

The exchange rate, on the other hand, has been little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates during that time.

Moreover, the demand for credit remains, at this point, relatively subdued.

The Board has previously noted that the inflation outlook would afford scope to ease further, should that be necessary to support demand.

At today's meeting the Board decided to use some of that scope. It judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy, consistent with achieving the inflation target.

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