Friday, 13 April 2012

ANZ hikes rates - RBA will seriously look at a 50 bp cut in May

The ANZ hiked its mortgage rate by 6 basis points in response to higher funding costs, largely in the wholesale market.  Like any business that wants to maintain profitability by putting up its price of dog food, hamburgers, washing powder or carpet when input prices rise, the banks are simply operating in a rational way. 

Now perhaps banks and interest rates are slightly different to the market for dog food, but as long as there is sufficient competition and price gouging is not occurring, it’s simply the market operating as it should.

For the RBA, the move from ANZ sends a powerful signal that for monetary policy to move to an even slightly accommodative setting, a cut of more than 25bps is needed on 1 May.  With mortgage rates around 10 to 15bps higher than at the start of the year and the economic news notably weaker, a 25 cut will not be sufficient to boost cash flows, confidence and lock inflation in the target band.  There is no certainty that a 25 cut in May would even be passed on in full, making such a move close to useless when the economy needs a bit of a kick start.

The RBA needs to cut 50 basis points in May.  It knows the Budget will be tight; it knows market conditions are skittish; it knows there is spare capacity building in the Australian economy; it will know after the March quarter CPI on 24 April that inflation is well contained.

Thankfully Glenn Stevens is super-pragmatic.  He just might come to the view that a little more monetary stimulus is needed in the current economic and market environment and try to convince the Board that a 25 cut isn't enough.

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