Mortgage relief as the Reserve Bank of Australia cuts rates in June

THE Reserve Bank of Australia has cut rates for the second month in a row amid growing fears of a global recession and a bloodbath on the Australian sharemarket yesterday.

The 25 basis points cut takes the central bank’s official rate to 3. 5 per cent. It follows a dismal week of data from the US, Europe and China which has painted a picture of a sharply declining global economy.

It also comes as Australian shares tumbled 2 per cent yesterday, wiping $ 26 billion off the market and tipping the balance in favour of today’s rate cut.

Other proof of a weakening domestic economy this week included monthly inflation figures sinking to zero, a gauge of the health of Australia’s corporate sector slumping more than expected and the ANZ job advertisements survey for May.

Just a week ago economists were divided on whether the RBA would deliver its second consecutive rate cut after lowering the official cash rate by 50 basis points to an official rate of 3.75 per cent in May.

But an AAP survey of 16 economists released today found 14 expected a reduction.

For a homebuyer with a standard $ 300,000 mortgage, the 25 basis points cut, if passed on in full, saves about $ 49 a month.

But borrowers are again at the mercy of the banks which will almost certainly pocket at least some of the discount.

The gap between the central bank’s official interest rate and the big lenders’ rates is the biggest it has been in 18 years. Last month just three out of 120 Australian lenders passed on the full 50 basis points reduction.

The four biggest banks passed on an average of 37 basis points to their variable lending rate and blamed rising funding costs for holding back.

The big banks have held back a quarter of the RBA’s official cuts over the past 12 months.

And borrowers shouldn’t hold their breath waiting for rate relief. Last month it took an average of 12 days for the big banks to pass through the rate cut to home loan customers with the Big Four making a collective $ 133 million profit for the delay.

Consumer groups are urging disgruntled bank customers to pick up the phone and switch banks.

Treasurer Wayne Swan, who briefed Cabinet last night on market volatility, said his predicted Budget surplus gave the Reserve Bank “maximum flexibility” to cut rates, and banks were in a good position to pass on cuts.

Financial regulators have advised the Government the banks are well financed for the next six months and have limited exposure to the economic turmoil in Europe.

Meanwhile, Westpac chief economist Bill Evans yesterday said the Reserve Bank could drop the official cash rate as low as 2.75 per cent by the end of this year. Mr Evans said economic conditions were fragile, necessitating deep rate cuts.

“You can’t ignore what’s going on in the market,” Mr Evans said. “There’s a fair degree of disquiet. Monetary policy is too tight given the shock to confidence and fragility of the economy. Retail has lost its momentum, house prices have edged off, capital spending is quite soft excluding mining.”

Source: news.com.au