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Reserve Bank Meeting October 2012

Reserve Bank drops Cash rate by quarter percent

Reserve Bank of Australia drops official Interest rate by quarter percent October 2012.

Reserve Bank Cuts Cash Rate by 25 Basis Points.

After the Reserve Bank met on Tuesday 2nd October 2012, Glen Stevens announced they would drop the official cash rate by 25 basis points or a quarter of one percent to 3.25 percent.

The decision was mainly due to the world economic growth outlook being weaker than expected, growth in China has slowed, economic outlook in Europe is contracting and growth in the United States remains modest.

China is Australia’s biggest export market with mineral resources such as iron ore.

Looking at factors within Australia, the Reserve Bank Board said the housing, or residential market remains weak, as does commercial building activity, with the the resources boom likely to peak in 2013 but be at a lower level than what was first anticipated, and while the rate of unemployment is low, with moderate employment growth, the labour market has softened in recent months.

The Carbon Tax got a mention, with the Board saying:

The introduction of the carbon price is affecting consumer prices in the current quarter, and this will continue over the next couple of quarters.

The decision also noted that credit growth had softened; people were not inclined to borrow money and that the exchange rate remained higher than expected.

In summary: the Board judged that:

On the back of international developments, the growth outlook for next year looked a little weaker, while inflation was expected to be consistent with the target. The Board therefore decided that it was appropriate for the stance of monetary policy to be a little more accommodative.

How the Government Reacted.

Federal Treasurer Wayne Swann was not slow in taking credit for the interest rate cut, saying that the cuts were due to Labor’s "responsible budget management".

If the full interest rate cut is passed on by the banks and lending institutions, it would equate to around $50 per month saving on a mortgage of $300,000 over 25 years.

How the Banks Reacted.

It would not come as a shock for most to learn that the banks were slow to make a decision on how much they would pass on to consumers, and none of the top four banks passing on the full rate cut.

The National Australia Bank and Commonwealth Bank passed on 20 basis points with Westpac only passing on 18 basis points of the Reserve Banks 25 point drop. ANZ were still to make up their mind, waiting for their monthly interest rate meeting on Friday, 10 days after the Reserve Bank made its announcement; cutting theirs by .20 percent, which would not take effect for yet another week. ANZ also announced they would cut interest rates on small business loans by 20 basis points.

About Nigel Brookson

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