The Reserve Bank board will cut at least three-quarters of a percentage point from interest rates when it meets again on December 2, and may even cut by a full point.
The minutes of the board's last meeting, on Melbourne Cup day, show it rejected a recommendation by officials to cut by half a percentage point and instead cut by three-quarters amid alarm about "confidence among consumers and businesses".
Board members, including governor Glenn Stevens, Treasury secretary Ken Henry and ANU economic modeller Warwick McKibbin, were especially concerned about the erosion of household wealth.
The rout on sharemarkets and the downward drift in house prices had cut household wealth by 8% in the nine months to September.
Board members feared that subsequent falls in share prices had made the slide greater. "Members noted that there were few precedents for the current developments in household wealth," the minutes record.
After presenting the board with the staff recommendation for a cut of half a percentage point in the cash rate, Mr Stevens suggested members consider a choice between that and a three-quarter cut.
They opted for the bigger cut to bring about "a further meaningful reduction in rates paid by borrowers and assist confidence among consumers and businesses". The aim was to bring rates "quickly to a neutral position".
The Reserve Bank has traditionally regarded the "neutral" cash rate as between 5.5% and 6%. This is the rate at which the bank would be neither stimulating economic activity nor winding it back.
But bank officials believe the neutral rate is now lower than that because of recent decisions by retail banks not to fully pass on cuts in the cash rate.
This would mean the cup day cut to 5.25% brought the cash rate only back to neutral and perhaps did not quite do that.
Given that there is a clear need for interest rates to stimulate the economy at the moment, it suggests a need for a further big cut in December, with a 0.50 cut regarded as the bedrock and a 0.75 cut more likely.
Should economic conditions deteriorate further, and especially if the United States is declared in recession during the next fortnight, a bigger cut of a full percentage point is likely.
A cut of one percentage point, if fully passed on, would reduce the standard bank variable mortgage rate from about 7.7% to 6.7%, cutting repayments on a $300,000 mortgage by an extra $200 a month. Monthly repayments would have dropped $570 from when mortgage rates were at their peak at 9.6% in August.
After December, the Reserve board is not due to meet again until February, but Mr Stevens stands ready to call an emergency meeting in January to deliver a further cut if needed.
In January the bank will have an indication of whether the $8.7 billion of Government stimulus payments due to be deposited into bank accounts from December 8 has boosted economic activity or been saved.
The bank has called unscheduled January meetings twice before, in 1990 and 1992 — in both cases to deliver a cut of one percentage point.
Late yesterday the futures market was pricing in a cut of one percentage point in December and a further three-quarters in February, with further cuts taking the cash rate down to 3.25% in May — which would be the lowest level since the 1950s.
Source From: SMH
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