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$250 you can bank on

HOMEOWNERS will receive the biggest single reduction to their mortgage payments in 16 years after a worried Reserve Bank slashed interest rates by one percentage point yesterday to shield the economy against the global financial crisis.

None of the major banks will pass on the cut in full but Westpac, the Commonwealth Bank, the NAB and the ANZ will reduce their standard variable rates by 0.80 percentage points from Monday.

This would reduce repayments on a typical Sydney mortgage of $450,000 by about $250 per month, or $3000 a year.

St George was last night reviewing the situation.

It was the first time since May 1992 – when the country was emerging from recession – that official rates were cut by a full percentage point. The cut was twice the size the markets were expecting and it reduced the official cash rate to 6 per cent.

The Government lauded the rate cute as decisive as well as large enough to give significant relief to borrowers while also ensure the ongoing stability of the banks.

The Opposition demanded the banks pass on the entire reduction to borrowers and not keep any for themselves.

The Reserve Bank Governor, Glenn Stevens, said the “unusually large movement” was “appropriate in order to bring about a significant reduction in costs to borrowers” but added the move was a one-off.

Mr Stevens said conditions on global markets took “a significant turn for the worse” last month and slowing global growth, particularly in Asia, was likely to reduce demand for Australia’s mineral exports.

Mr Stevens said Australia’s terms of trade – its export prices relative to imports – was likely to have peaked. Inflation was still tipped to hit 5 per cent but start falling next year.

“The deterioration in prospects for global growth . . . now present the risk that demand and output could be significantly weaker than earlier expected. Should that occur, inflation would most likely fall faster than earlier forecast.”

The Treasurer, Wayne Swan, reminded the banks the Government expected them to pass on the remainder of the official rate cut when their own borrowing costs had eased.

“That is our bottom line,” he said.

In recent days, Mr Swan and the Prime Minister, Kevin Rudd, have defended the banks, saying a sharp increase in their borrowing costs recently would prevent them from passing on in full any rate cut.

Mr Rudd said yesterday this was an unpopular but necessary stance.

“What we have been concerned about first and foremost is the stability of the Australian financial system,” he said.

He said the decision allowed the banks to give significant relief to families and businesses while adding to the stability of the banks themselves. He took a swipe at the Opposition Leader, Malcolm Turnbull.

“Every responsible politician and political leader should welcome this decisive action and should have as the cornerstone of their concerns relief for those who are borrowing money, but the continued stability of the financial system as well,” Mr Rudd said.

Mr Turnbull, who had been anticipating a 0.50 percentage point cut – of which the banks were expected to pass on only half – was unmoved. “I believe, based on their profitability and their strength and their size, they are able to pass on the full amount of this official rate cut,” he said.

Economists were split on the timing of future interest rate cuts, but futures markets were expecting more large cuts, taking the cash rate to 4.5 per cent by early next year.

NAB expects another half a percentage point cut in November.

The ANZ chief economist, Saul Eslake, believed the Reserve had combined future cuts for maximum impact. “I think it lessens the likelihood of further reductions in interest rates anytime soon, because I think they brought forward what they might have been planning to do over a longer period,” he said.

A strategist at TD Securities, Joshua Williamson, said the bank may sit on its hands next month, having in effect delivered next month’s planned reduction in one hit this month.

The president of the Real Estate Institute of NSW, Steve Martin, said the rate cut was “great news” and would put momentum back into the real estate market, one of the state’s key economic drivers.

After a heavy fall yesterday morning, the benchmark ASX200 index gained 1.7 per cent on the news. The dollar fell US2 cents and closed below US73 cents.

Business Daily
The Sydney Morning Herald
by Phillip Coorey and Jessica Irvine
8th October 2008

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