While the beginning of an economic slowdown has been enough to convince the Reserve Bank of Australia (RBA) to contemplate an easing of monetary policy, it will want to remain reasonably tight until there is evidence that inflation is moving into its target zone of 2 to 3 per cent. Although the RBA cannot wait for a fall in inflation before it starts cutting rates because it has to act pre-emptively, there is still a lingering inflation problem and downward pressure on prices needs to be maintained. In saying this, the RBA will go for a 25 basis point cut on September 2 then another 25 points in October. Beyond that the Reserve can determine whether it thinks the economy is about to fall into a hole and can then continue to cut rates if necessary.
However, the scope for official rate cuts is complicated by another matter – will the major banks pass on reductions in official rates to their retail lending rates and ultimately to our home mortgage rates? In spite of their recent profit announcement, banks like the Commonwealth Bank of Australia are tight lipped about passing official rate cuts onto customers.
In the 1990s the banks were labeled “bastards” for outrageously increasing fees, closing branches, and getting rid of low value customers. It’s a reputation the banks have only just repaired and a period they would rather forget. They might be greedy but they’re not stupid. If they live up to their threats not to lower lending rates despite what the RBA does, the banks know they’ll be roundly condemned by everyone – both sides of politics, the media and every radio talk-back shock-jock in the business.
(references: Sydney Morning Herald 18 August 2008; Canberra Times 17 August 2008)