RBA cut could deliver $55m boost to economy

by Adam Smith10 Apr 2012

A Reserve Bank cut of 25bps could inject more than $50m into the economy as consumers loosen their spending habits.

That's the claim of comparison site RateCity, with the company saying the ensuing boost to consumer confidence from a cut could prove a boon to retailers. RateCity research has indicated that a cut to the cash rate could see consumers spending to the tune of $55m.

RateCity chief executive Damian Smith said low consumer confidence is continuing to cause Australians to hold onto their money, to the detriment of retailers.

"Consumer confidence is dismal across Australia – we’re seeing this impact the home loan market where the number of home buyers is at a five-year low, credit card growth has slowed and retailers are suffering.

"Two trends are absolutely clear. First, many existing mortgage holders are paying down debt faster. The RBA estimates that 50% of mortgage holders are paying more than the minimum required each month, and collectively, Australia’s mortgage holders are paying nearly double the minimum amount in total. A further 45% are estimated to be paying the minimum each month. Second, instead of spending, Australians are saving their money at some of the highest levels on record," Smith said.

With approximately 2.5m Australian households on variable rate mortgages, Smith said a cut to the cash rate could have far-reaching consequences for the economy.

"If, for example, half of those households took a 25bp rate cut and spent that money in the broader economy – in the retail sector for example – we’d see an increase of over $55m in retail spending. That represents about a 0.3% increase in spending. Total annual retail sales growth for 2011 was just 2%, so this would be a significant uplift," he said.

Of course, this boost from consumer spending is far from a foregone conclusion. Smith said the only way to see benefit from an RBA cut was to apply pressure on banks to pass on the cut in full, a move that banks have signalled is unlikely.

"Australia’s major banks, which make up the majority of the home loan market, have decided to cease following the RBA’s rate movements and we believe this is the biggest factor impacting consumer confidence. Australians now face an environment where they can’t predict which way their home loan rates will go, regardless of what the RBA does.

"We saw from the last two RBA rate drops that the major four banks didn’t pass on the full 50 basis points to their variable customers. While ANZ passed on the most out of the big four banks of 44bps, NAB passed on only 36 of the 50bps. Retailers are pressuring the RBA, but they also need to place greater pressure on major banks directly to pass on any rate cut in full," he said.

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