A rate cut is coming, but will the banks follow?

Founder and Publisher of the Switzer Report
Print This Post A A A

Last year the economy grew at a 2.6% pace, well below the 3%-plus rate expected by Treasury and the Reserve Bank. The end-result was an easing of interest rates – 25 percentage-point cuts in both November and December – as retail laboured and employment fell.

“Jobs growth is now going backwards, adding to data showing sluggish retail spending, a weak housing market and lacklustre activity in manufacturing, services and construction sectors,” said CommSec’s economist, Savanth Sebastian. “In fact, over 2011, there were no jobs created with a total of 100 jobs being lost – marking the weakest result for a calendar year since 1992.”

Creating jobs should be a high priority of a Labor Government and so with employment going backwards – it isn’t a good sign with the Gillard team’s rating with voters around 30%.

So it’s not surprising that a growing chorus of economists are singing from the same hymnbook that another rate cut is likely at the first meeting of the Reserve Bank of Australia (RBA) on Tuesday 7 February.

I suspect there is a good chance this will happen, but it’s likely to be the last unless poor European decisions over debt and deficits lead to more stock market sell-offs.

Banking on a standoff

On the subject of interest rates both the Reserve Bank and the Federal Government look set to be on a collision course with the major banks, whose bosses are starting to plead poor mouth, which could see them refuse to pass on any future interest rate cut in full.

The seemingly endless weeks of poor decisions and inconclusive meetings coming out of the European Union have resulted in increasingly higher interest rates for sovereign bonds for most member countries and the pressure on bank balance sheets of customers who might default has pushed-up the cost of funds for banks, such as ours, which rely on external funding for about half of their local loans.

Leading the charge against the RBA and the home-loan borrowers of Australia, who have grown up expecting that banks play follow the leader with the central bank, is ANZ’s chief executive, Mike Smith.

In January, his bank started setting and announcing what its home loan rate would be on a monthly basis. Smith says he is going it alone – independent of the RBA and his rivals.

“The change in the RBA’s official cash rate is one factor we assess when looking at funding costs,” Smith has argued. “However, the price we pay for customer deposits, and for the domestic and international wholesale funding that we rely on in order to continue to lend, are much more important considerations.”

If and when the RBA next cuts – and it has to be on Tuesday – there will be an enormous focus on what Smith and ANZ do and it will put the focus on just how competitive our big four banks are. And while the Reserve Bank is unlikely to say anything publicly, you can bet the Prime Minister and her trusty world champion Treasurer, Wayne Swan, will be champing at the bit to get into some good old bank bashing to raise their popularity ratings.

I think the Aussie economy and the stock market will have a good year despite the expert negative types out there, but the second half of the year will be better than the first and it will be two rate cuts early this year that will create a better economy and stock market.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Also in the Switzer Super Report

Also from this edition