According to the papers, yesterday’s 0.75% interest rate cut by the Reserve Bank of Australia (RBA) was a surprise. Not according to the markets it wasn’t. As we pointed out on Monday, there was a 79% chance the RBA would cut the Cash Rate to 5.25%.
Now we wonder whether the market is starting to get a little too excited about future rate cuts. It has a habit of doing that sometimes.
As the table above shows, there is now an expectation the RBA will cut to just 4.5% at the December RBA meeting.
Why is the RBA cutting rates so heavily? Simple, the outlook for the Australian and global economies is not looking that good. Not in the near term anyway. The ANZ Job Advertisements survey released on Monday fell by 5.9% from the previous month. And they were 9.8% lower than 12 months ago.
It’s a clear sign that businesses are reining in expenditure. Of course it doesn’t necessarily mean that they are no longer hiring. Just that they may not be willing to shell out cash to look for new staff.
Bank to Reap Profits from Rate Cuts
There was a surprise of sorts yesterday. Although we were probably just being naïve… considering all the recent hoopla we thought the banks would unanimously pass on most of the rate cut.
How wrong we were.
As it stands only the Commonwealth Bank [ASX:CBA] has passed any of the rate cut on. It will drop its standard variable rate mortgage by 0.58%. That’s still 0.17% less than the RBA’s cut.
But as we say, we shouldn’t have been surprised. What is the incentive for the banks to rush through a rate cut now? There isn’t one. Thanks to the 1% cut (most banks passed on 0.8% to customers) last month mortgage rates are already down from recent peaks.
Cutting its interest rate does nothing for a bank apart from lose it money. And why would it do that when it knows many home owners won’t bother to change banks anyway? Who wants to pay to have their home valued when there is a reasonable chance the value has fallen?
For those that have close to the maximum mortgage against their home, they have very little wriggle room anyway. The banks know this. Even for those that saved a bit extra and took out a smaller mortgage, they may still find the value of the property lower. Their home equity will thus be lower too.
Add that to the current situation: the major banks are in a cash grab for deposits. Most banks are offering ‘honeymoon’ rates on savings accounts designed to attract investors from non government guaranteed cash-like investments. The banks will be keen to maintain these higher rates for a while longer.
The fact is we have no idea what the banks will do with interest rates. The other major banks may pass some or the entire rate cut on today. Or they may not.
Whatever they do, it is clear that they are holding all of the cards.
Cheers.
Kris.