Retailers rejoice over rate cut but banks voice uncertainty

Retailers have welcomed the Reserve Bank’s decision to cut interest rates ahead of Christmas, but the banks remain uncertain about the likelihood of another rate cut.

Yesterday, the RBA cut interest rates by 25 basis points to 4.5% – the first rate cut since 2009 – warning global economic turmoil could cause “precautionary behaviour” among businesses.

The RBA said the rate cut was necessary in light of the slowdown in the global economy, while the Australian economy continues to stall amid cautious consumers and the strength of the dollar.

The Australian Chamber of Commerce and Industry described the rate cut as “the single most positive thing” that has happened to SMEs in the last 12 months.

“We would expect the banks will swiftly pass on the full value of the official interest rate reduction to both business and household consumers,” ACCI said in a statement.

According to the Australian Retailers Association, the RBA’s decision will bring some much-needed relief to retailers, who “have been saved in the nick of time from a disastrous Christmas”.

“This will at least be a short-term boost for retailers… Hopefully, we will see some more consumers walk through doors,” ARA executive director Russell Zimmerman says.

“It’s now up to the banks to pass the interest rate cut on in full to businesses and consumers.”

Westpac has moved to match the RBA, cutting its standard variable rate by 25 basis points to 7.61%, effective from November 14.

The Commonwealth Bank has also lowered rates on a series of variable home packages by 25 basis points, trimming them to between 7.66% and 6.86%, effective from Friday.

Earlier today, ANZ announced it will lower interest rates for variable rate mortgages by 0.25%, while NAB also reduced its rate, although by only 20 basis points.

Bank of Queensland and ME Bank have also joined in, announcing their own rate reductions.

Ian Hendey, of ME Bank, says it makes sense to reduce interest rates, particularly in an environment where “concern over shareholder profit often supersedes customer-centric strategy”.

While most of the banks have wasted no time announcing rate reductions, they remain uncertain about the likelihood of a further rate cut.

Westpac chief economist Bill Evans says his bank continues to expect the next rate cut to come in February “after the [Reserve] Bank gets further evidence on inflation”.

“For Westpac to move its forecast for the next move forward to December, there would have to be an extremely muted response in terms of confidence,” Evans says.

“[There would have to be] a sharp further rise in the unemployment rate and probably an unexpected deterioration in global financial markets.”

“That prospect certainly cannot be fully dismissed but is not our central view.”

Ivan Colhoun, head of Australian economics and property research at ANZ, says the RBA’s statement offers “few clues” about possible future action with regard to further rate cuts.

According to Colhoun, further rate cuts will depend on a further weakening in the global or local economic outlook, including a more moderate outlook on inflation.

“We will stick with our forecast of another rate cut in February, though on current developments and our forecasts for inflation and GDP growth, this is a finely balanced call,” Colhoun says.

“How consumer and business confidence responds to this interest rate cut will be very important in whether a further move is forthcoming from the RBA.”