Australian Reserve Bank Interest rate watch – May 2012

After 4 months of no changes to the cash rate since December (when the cash rate was lowered by 0.25%) the Reserve Bank decided to cut the cash rate at its Board meeting on 1st May, by 0.5% or 50 bps, to 3.75%.

This reduces the gap between Australia’s cash rate and the lower cash rates of major economies around the world.

The bank cited an updated lower-inflation outlook over the coming 1-2 years, the potential source for adverse shocks from Europe, and a slowing in growth in the world economy, especially a moderation in growth in China, as major factors in its decision to cut rates.

Interestingly, noting the impact of higher costs of borrowing overall for lenders since mid 2011, the bank anticipates that lenders won’t pass on all of the Reserve bank’s interest rate cuts, and therefore took this into account when choosing to reduce its target cash rate by 50 bps. This acknowledgment and new approach to rate-setting must be a win for the major banks, who have been campaigning about the need for banks to be able to set their own rates independently from the Reserve bank’s rate-setting activity. It would seem they have influenced the Reserve bank.


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