Analysis and opinion of the Reserve Bank of Australia’s 0.25 per-cent rate cut have been rife in the media in the weeks leading up to the decision, made November 1. Whether you predicted the cuts or not, the Commonwealth Bank made the decision early on to pass the lowered rates on to its customers.
Key in the rate cut decision was the inflation data released October 26, which revealed September quarter core inflation was up 0.6 per cent while underlying inflation rose up 0.3 per cent – the most sluggish pace in nine years and a rate below economist predictions. The data not only gave further ammunition for a rate cut on Melbourne Cup Tuesday, but also possibly set the stage for an additional one in early 2012. The cash rate has stood at 4.75 per cent since last November.
Taking that information as well as funding costs into consideration, the Commonwealth Bank decided to apply the rate cuts after the RBA decision was announced that afternoon of November 1. On November 4, the Bank began a 0.25-percentage-point rate cut to its standard variable mortgages, dropping them from 7.81 per cent to 7.56 per cent. The same rate cut also applies to the Bank’s new No Fee mortgages, which went from 7.11 per cent to 6.86 per cent. The base variable rate of the Economiser dropped from 7.30 to 7.05 per cent and the Viridian Line of Credit residential equity rate went from 7.91 per cent to 7.66 per cent. The rate cuts apply to both new and existing Commonwealth Bank customers.
Experts and the public weigh in
The initial rate cuts may signal more to come, according to economists and other experts.
“The subdued inflation result reflects weak demand conditions in the economy and highlights poor trading conditions outside the buoyancy of the mining and its related sectors,” Greg Evans, director of economics for the Australian Chamber of Commerce and Industry, said in a statement quoted in the Herald Sun.
Matthew Johnson, interest rates strategist for UBS, foresaw the world economy being a trigger for additional RBA rate cuts this year.
“There will probably be cuts in November and December and then we’ll see what happens,” he said in an Australian Associated Press story.
Meanwhile, Australians seemed to be confused about and a tad suspicious of the initial rate cut, even though they thought it would help homeowners in the short-term. Readers commenting on a Herald Sun article about the cuts wondered what they’d mean for home prices and questioned the message they’d send to other world economies.
“I don’t understand what a cut will achieve,” said Luke of Kerang, Victoria. “It will only drive up inflation in the months ahead. Also, a cut will send off negative messages to the rest of the world!”
“The last rate rise was a big mistake and you have caused [sic] much unnecessary pain to the non-mining, non-banking economy (the real Australian economy),” said PC of Craigieburn, posting under the same article.
Michael Grienke, commenting on a Business Spectator article, said, “It’s just spend, spend, spend by these clueless clowns in government. When mining receipts drop, I think Australia will be able to give the Greeks a lesson in societal and economic destruction. I would argue CPI is incorrectly estimated and this bureaucratic [sic] distortion will hurt everyone if interest rates are cut, as resulting inflation touches all of us.”
Jim of Brisbane, posting on a Sydney Morning Herald column, said, “Cut rates, the dollar drops and the price of fuel/imported goods increases. You don’t really win anything by cutting rates.”
“The elephant in the room is not interest rates, but astronomical house prices…The market will have to sort out the mess,” said Bobby of Highgate Hill, Queensland, posting under the same column.
How do you feel about the rate cuts? Are they a welcome help to you or do you think they signal hard times ahead?