The Reserve Bank of Australia has shocked the market by cutting the official cash rate by 1% to 6%.
The Reserve Bank of Australia has shocked the market by cutting the official cash rate by 1% to 6%.
The size of this cut will be seen as a clear indication of how worried the RBA is about the state of the economy. The last time the RBA cut rates by 1% wasa in May 1992 – the last time the Australian economy was in recession.
CommSec chief economist Craig James told Sky News that the RBA has taken “decisive action” in the face of the turmoil on global markets.
“The RBA has not mucked around. Effectively what the bank is doing is front-loading any rate cut and making sure that it is passed onto consumers by the banks.”
RBA governor Glenn Stevens says the bank was forced to act after conditions in international financial markets took a significant turn for the worse in September.
“Large-scale financial failures in several major countries were accompanied by serious dislocation in interbank markets and heightened instability in other markets, including sharp falls in share prices,” Stevens said in a statement.
“Financing is likely to be difficult around the world for some time ahead. This is also affecting Australia, albeit by less than in many other countries, given the relative strength of the local banking system.”
“The recent deterioration in prospects for global growth, together with much more difficult market conditions even for creditworthy borrowers, now present the risk that demand and output could be significantly weaker than earlier expected.”
Read the full statement here.
The next big question is: how much of the rate cut will the RBA pass on?
Most economists had predicted the RBA would cut rates by 0.5% and expected the banks would pass on around 0.25% to mortgage customers.
The size of the RBA’s cut should give the banks more room to move, although it is highly unlikely that the entire 1% cut will be passed on.
Craig James says it may take some time for the banks to adjust to this shock.
“We are going to see a rate cut going to be passed on to mortgage holders, so that’s something to cheer about. The magnitude of that cut is still unknown.”
National Australia Bank says it is waiting for the market to calm before announcing its decision on rates.
The head of consumer advocacy at mortgage company Resi, Lisa Montgomery, says non-bank lenders will wait for the big banks to move.
“We don’t know how much the banks will pass and they are the market leaders. We’ll now have to play the wait-and-see game.”
Investors have been cheered by the cut. The S&P-ASX 200 was down around 2% before the announcement and is now up aroun 1%.
Smart Company is the leading online publication in Australia for free news, information and resources catering to Australia’s entrepreneurs, small and medium business owners and business managers.
