RBA says rate cut still a possibility

The Reserve Bank of Australia is holding fire on interest rates, but says another cut is possible.

Most forecasters, including economists from all four of Australia’s major banks, are now saying that a rate cut is not likely to happen until early 2014.

Most have changed their predictions in the past two weeks.

The RBA’s willingness to wait was made clear in the minutes of its October 1 board meeting which repeated a line, word for word, from the September minutes.

‘Members agreed that the bank should neither close off the possibility of reducing rates further nor signal an imminent intention to reduce them,’ the RBA said on Tuesday.

NAB senior economist Spiros Papadopoulos said the central bank would be hopeful that its recent cash rate reductions were enough to support long term economic growth.

‘The effect of lower interest rates still has further to run, but the impact in the housing market is already evident, with gains in prices, auction clearance rates, loan approvals and credit growth,’ he said.

The RBA last reduced the cash rate in August by quarter of a percentage point to a record low of 2.5 per cent.

It said international economic conditions had improved recently, with Chinese growth getting stronger, and signs the US economy was continuing to grow at moderate pace.

The minutes made only brief mention of the stalled US budget negotiations, which resulted in the US government shutting down on the day of the October 1 board meeting.

Australian economic growth remains a little below average, with investment in both the mining and non-mining sectors staying subdued, the bank said.

‘Consumer confidence was above average levels and business confidence had increased, although it remained to be seen if this would be sustained,’ the RBA said.

An important aspect of the RBA’s statement was that it made little mention of the high exchange rate, RBC Capital Markets senior economist Su-Lin Ong said.



Big four banks stronger than ever

At the same time as some financial planners worry about the dominance of the major banks, a new Morningstar analysis claims the big four banks are stronger now than they were before the Global Financial Crisis and more than capable of seeing off any competitive assaults.

The Morningstar analysis, which included an upgrading of the so-called “moat rating” to “wide”, made clear that Australia’s four major banks now joined only one other bank awarded a wide moat across Morningstar’s global bank coverage universe.

In its analysis of the banks, Morningstar noted that the four major banks “have consistently and successfully fought off the threat of competition from foreign banks, regional banks and non-bank lenders”.

“Shadow banking in the commercial and retail sectors in Australia and New Zealand is immaterial. Potential competitors have tried many times to break the stranglehold enjoyed by the major banks, but to no avail,” the analysis said.

“In our opinion, the major banks are considerably stronger now than before the financial crisis and, even in the depths of the crisis, ROEs were still impressive (Commonwealth Bank fell to 15.8 per cent, Westpac Bank 13.8 per cent, ANZ Bank 13.3 per cent and National Australia Bank 11.8 per cent).”