Business applauds RBA rate cut – now for the banks to pass it on

The business community has largely applauded the RBA’s decision to cut the official cash rate by 25 basis points to 3.5%, but now comes the hard part – getting the big banks to pass it on.

Bank of Queensland was the first major bank to move following yesterday’s decision, passing on 20 basis points of the 25 basis-point cut to its mortgage holders, taking its variable mortgage rate to 6.91%.

Federal Treasurer Wayne Swan has once again urged the big four banks to pass on the cut in full, but with the European crisis casting a pall over global credit markets, this seems unlikely.

But that hasn’t stopped the business lobby groups making their case to the finance sector.

“The Reserve Bank is moving monetary policy to a more accommodative setting and helping to restore confidence,” the Australian Chamber of Commerce and Industry’s director of economics and policy, Greg Evans, said last night.

“Today’s lowering of rates is for the benefit of consumers and businesses, it is not for the banks to help boost their profitability.”

Evans’ call was supported by the Australian Industry Group, which has released a string of reports in the last few days showing the manufacturing and services sectors are languishing. AIG chief Innes Willox also says the commercial and residential construction sectors are “in the doldrums”.

“Business will be looking to the major banks to pass on the rate cut in full to give a much-needed boost to household spending and business investment.”

The Australian Retailers Association was happy with the cut, but wants more to be done, warning that the arrival of the carbon tax and wage rises will put pressure on a sector already bleeding.

“For the past few months, retailers have been the catchment point for the big banks’ failure to pass on rate cuts and in many cases their decisions to raise them,” ARA chief Russell Zimmerman said.

“Retailers are today calling on banks to read the neon signs flashing before them to pass on the rate cut in full.”

“With recent economic indicators showing the Australian economy has stalled, with the possible exception of the mining sector, the need for RBA to continue to stimulate the economy over coming months is now becoming very clear.”

Economists agree, with most tipping at least one more cut before the end of the year.

HSBC chief economist Paul Bloxham (who is a former RBA staffer) says the market is pricing in 150 basis points of cuts before the end of the year, but expects only one more 25-basis-point cut in the third quarter before the RBA sits at 3.25% until the second quarter of 2013.

But Westpac’s chief economist Bill Evans is sticking by his prediction that rates will fall to 2.75% by the end of 2013.

“With the policy stance still only described as ‘a little below average’ the range of economic threats associated with the global economy, a high Australian dollar and cautious business and households indicate to us that rates need to go down a lot further than we saw today.”

Of course, as CommSec economist Craig James points out, more rate cuts won’t exactly mean great news for business.

“We have pencilled in another quarter per cent rate cut in August. Hopefully this rate cut won’t be required.

“That is, the hope is that Greece opts to stay in the euro; that the Spanish banking system is supported; that China acts to stimulate its economy; and that Aussie consumers start to spend, invest and borrow again.”

This article first appeared on SmartCompany.