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Reserve Bank to Further Cut Interest Rates

Posted by Paul Wilson

THE Reserve Bank has not ruled out further rate cuts after it slashed 1 percentage point from borrowing costs yesterday, while the Government stands ready to rain more money on families.

A household with a $400,000 mortgage will save $257 a month after yesterday’s cut, provided their bank passes on the full reduction in official rates.

If their lender dropped rates by only 0.8 points, borrowers would save $207 a month.

The big banks split into two camps yesterday. The Commonwealth Bank and the NAB dropped their standard variable rate by the full 1 percentage point. But the ANZ cut by only 0.83 points and Westpac by 0.8, both blaming higher funding costs.

Since September the Reserve has slashed the official cash rate by 3 percentage points, from 7.25 per cent to 4.25 per cent – the lowest level since late 2001.

The Prime Minister, Kevin Rudd, suggested yesterday’s cut was unlikely to be the last, with national accounts figures published today to reveal the impact of financial turmoil.

With confirmation the US had fallen into recession, Mr Rudd told Parliament Australia faced “a tough 2009″ and that forecasts for growth and unemployment would probably deteriorate.

”If recession deepens around the rest of the world, there is a grave risk that these figures could become worse,” he said. “This will be a long and drawn-out crisis.”

Earlier Mr Rudd told caucus the Government, already close to deficit, would pour more money into the economy in another stimulus package if required: “We must demonstrate to the Australian people that there is a fundamental basis for hope and optimism.”

The Treasurer, Wayne Swan, said the Government and the Reserve Bank were working together to try to stimulate the economy and protect jobs. The big banks should do their bit and pass on the latest cut in full, he said.

Those banks that passed on the full rate cut showed those who were holding out that it was possible. “Get your skates on and pass it through,” he said.

Mr Swan said the rate cut would be a relief to households with a high burden of debt.
 ”And that has been particularly the case, and felt, I think most acutely throughout Sydney,” he said. “In a city where it costs a lot to get into the housing market, I think this will be welcome.”

If passed on in full, the past four rate cuts would cut about $800 a month from the cost of servicing a $400,000 mortgage.

The Reserve Bank Governor, Glenn Stevens, in his accompanying statement, said demand would be subdued as business and household confidence was undermined by turbulence in financial markets and falling commodity prices. The Reserve board would “continue to monitor developments” and make adjustments “as needed” to promote growth while trying to hold inflation between 2 and 3 per cent.

The Reserve board is not due to meet next month, meaning that unless it calls an emergency gathering the next cut in rates could not come until February.

Financial markets are betting on another 0.75 percentage point cut then. This would take the cash rate to 3.5 per cent, its lowest since 1965.

The shadow treasurer, Julie Bishop, said banks should pass yesterday’s cut on in full not only to home loans but to credit cards and business loans.

She will today call on the Government to request Treasury produce fresh economic forecasts.

The revision of the May budget, published only a month ago, lowered the forecast growth rate for this financial year to 2 per cent. That was based on an assumption the cash rate would be a stimulatory 4.25 per cent by the end of June.

With that rate having already been achieved, Ms Bishop said it was logical that the growth forecast could be higher because rates would be even lower by June.

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