The Reserve Bank Eases Pressure

Sydney Morning Herald

Wednesday September 3, 2008

THE Reserve Bank's decision to cut interest rates by 25 basis points has surprised no one: the cut was widely expected after hints from the bank's board and was regarded as a foregone conclusion on both sides of politics. As households struggle under big debt burdens, many borrowers will be asking whether the cut means the Reserve has admitted it went too far with its previous rises.

So bald an admission is unlikely to be found in any of the bank's carefully nuanced utterances. But in the bank board's defence, it has been framing its interest rates policy at a tricky time for the national economy. The US, Japan and parts of Europe are in, or near, recession. In Sydney and Melbourne, and outside the mining states, the economy feels flat; in Queensland and Western Australia, on the other hand, the income from coal and iron ore exports to China and other rapidly developing economies is rising at astonishing rates, and spreading money, confidence and exuberance into the hinterland. The bank has been trying, with successive interest rate rises, to curb the inflation that the resulting demand has created, and to engineer a soft landing for the national economy.

Its task has been complicated by the credit crunch, which has led the big banks to raise mortgage and other rates higher still. It has been complicated further by the gyrations of the oil market, which both push up the price of petrol, increasing inflation and reduce consumers' spending power. The overall result was that although inflation was still above the bank's comfort zone, a series of pallid statistics on consumer spending has shown the economy looking sicker than the bank wanted. Hence the cut. There will probably be more, too.

With the (completely unfair) benefit of hindsight, perhaps the bank did tighten rates too far - but not much too far, and now it is adjusting to return the economy to equilibrium. The decision of all the big banks to pass on the full cut to borrowers was more of a surprise. Some had been hinting such a thing might not be possible while the credit crunch was pushing up the cost of money. But with National Australia Bank vowing this week to pass on the full cut, and the mortgage lender Wizard Home Loans cutting its rate early, the pressure was on. Competition has worked, this time in the consumer's favour.