RBA cut held banks’ ‘feet to the fire’

by Adam Smith04 May 2012

The Reserve Bank’s 50bp cut, in one economist’s view, was an attempt to “hold the banks’ feet to the fire” on mortgage rates.

BT Financial Group chief economist Chris Caton told the National Mortgage Brokers conference in Hamilton Island that the RBA made a dramatic move on rates to spur the banks into action.

“To me they were really holding the banks’ feet to the fire, and of course a couple of the banks have passed on most if not all of that cut,” Caton said.

Caton said many economists were shocked by the drastic move, and commented that the Central Bank generally only makes deep cuts to the cash rate when faced with economic turmoil.

“The 50bps took a lot of people by surprise, and the reason for that is we’ve been trained like Pavlov’s Dogs to expect interest rate cuts of a quarter of a point at a time unless something changes and changes dramatically in the short term. That hasn’t happened,” he said.

However, Caton pointed to the RBA's Statement on Monetary Policy. He said the statement implied that the Reserve made a more significant cut to the cash rate to move lenders into action.

“In the last paragraph of this statement, they said in their view that financial conditions should be easier now that they were in December. You can translate that to say that variable mortgage rates should be lower, and I guess they said, ‘We’re not sure 25bps is going to do that, so we’re giving you 50’,” Caton said.

While some economists, such as Westpac’s Bill Evans, have predicted a further 25bp cut before the end of 2012, Caton was hesitant to pencil in such a reduction. With NAB reducing standard variable rates by 32bps and CBA moving by 40bps, Caton said early indication may be that the RBA has achieved its goal.

“The Reserve Bank probably hopes that it is done. I wouldn’t be expecting any more rate cuts, but then I wouldn’t rule it out either,” he said.