As many predicted, the Reserve Bank of Australia (RBA) has cut interest rates to 4.25% at its December meeting. But it is not yet clear whether banks or consumers are set to benefit most.
After a long period of interest rate stability, the move marks the second cut in any many months. RBA governor Glenn Stevens attributed the cut to "considerable turbulence" in financial markets, and reiterated that bank financing conditions had become more difficult thanks to the eurozone crisis.
Just last week, major Australian banks were downgraded by credit ratings agency Standard & Poor’s, which has added to the pressure that banks are under to find funding. "Precautionary behaviour", Mr. Stevens added, "means that the likelihood of a further material slowing in global growth has increased."
But homeowners and businesses are facing a nervous wait to discover whether banks are to pass on the cut, after a subdued response to the announcement.
Federal Treasurer Wayne Swan, who was outspoken last month at NAB’s decision not to pass on the full 0.25% cut to consumers, again stated that there was "no excuse" for the banks not to pass on the rate cut in full.
"Today's decision to cut interest rates again will provide Christmas cheer to families and small businesses which is particularly welcome around Christmas," he said.
The Bank of Queensland took only five minutes to announce that consumer and business borrowers would receive the full benefits of the interest rate cut, though only they and Credit Union Members Equity have responded.
Retailers are not yet sure whether cheer is to follow, and have declared the fate of their Christmas as resting heavily in the hands of the banks. From the banks' perspective, bracing for hardship ahead, huge sums are at stake for every fraction passed on to consumers in terms of lower home loan rates or improved savings account returns.
The prospect of a financial downturn has sparked predictions that central interest rates could tumble next year, though it remains to be seen whether this will encourage banks to cooperate in the foreknowledge that further rate cuts could be ahead.
Ashley King
