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MARK COLVIN: The Melbourne Cup may not have been today's only photo finish.
Economists were split over whether the Reserve Bank would cut rates or not this afternoon,
and it's likely the bank's board was divided too. In the end, the arguments for a cut prevailed,
taking official interest rates to 4.5 per cent.
Retailers and the construction sector are happy but they want to see more rate relief
and some economists say they may see it, perhaps in time for Christmas.
Business reporter, Michael Janda.
MICHAEL JANDA: What would you prefer - a win on the Melbourne Cup or lower interest rates?
VOX POP 1: I'd prefer lower interest rates.
MICHAEL JANDA: No matter how much they lost on the Melbourne Cup, most people with mortgages
came out ahead today, courtesy of the Reserve Bank.
(Traders on the trading floor)
MICHAEL JANDA: The Bank cut the official cash rate by 25 basis points to 4.5 per cent.
JP Morgan's interest rate strategist Sally Auld says the decision to cut rates may have
been almost as close as the Melbourne Cup finish.
SALLY AULD: It was probably a close call. I mean the argument effectively for lower
rates was that the RBA had been running policy at mildly restrictive levels for the past
12 months and I think given the shift in risks around the inflation outlook, the global growth
outlook and the domestic growth outlook it made a lot more sense to move policy to a
more neutral stance.
MICHAEL JANDA: But Macquarie's senior economist, Brian Redican, says the case for a rate cut
was compelling.
BRIAN REDICAN: The Reserve Bank had acknowledged that monetary policy was tight over the last
12 months but with inflation now looking more like 2.5 per cent or right in the middle of
the Reserve Bank's target band and growth only moderate and those fairly major downside
risks to global activity, the argument for having interest rates at neutral, where they
don't either support or contract the economy, I think was a fairly easy case to make.
MICHAEL JANDA: Westpac also had an easy decision to make. The bank releases its multi-billion
dollar annual profit result tomorrow and anything less than passing on the full rate cut would
have been a PR disaster.
Within minutes of the Reserve Bank's decision, Westpac announced a matching cut to its standard
variable home loan rates but it'll be almost two weeks until it takes effect.
The Commonwealth Bank also announced a 25-basis-point cut, effective this Friday. The rate cuts
will save a homeowner with a $300,000 mortgage on a 25-year term $49 a month.
Retailers are hoping some of that money will go towards Christmas presents and parties.
Margy Osmond from the Australian National Retailers Association.
MARGY OSMOND: Modest it may be but it sends a very important message and I think you would
see retailers across the country dancing in the aisles at the moment because this is going
to encourage people to perhaps have a little bit of splurge this Christmas.
MICHAEL JANDA: Do you think that Christmas retail effect is why the bank has moved rates
every November for the last six years?
MARGY OSMOND: Look this is clearly a key month because it's a time when people's attention
and their focus is looking towards Christmas and the possibility of what they might spend
and what they might like to spend.
We certainly hope that after lots of good solid saving and debt retirement over the
last year or so that everybody might feel a bit more relaxed about spending a little
more this Christmas.
MICHAEL JANDA: Residential construction has also been in the doldrums, so that sector's
happy too.
The construction union's national secretary Michael O'Connor says the mining boom hasn't
been enough to offset the weakness in home building.
MICHAEL O'CONNOR: In both the manufacturing sector and in the housing market where many
of our members are working and also building and manufacturing products for the housing
sector, there's been a, it's been very quiet, very slow and many jobs have been put under
pressure.
MICHAEL JANDA: And Sally Auld says the Reserve Bank's finally got that message.
SALLY AULD: They're sort of telling us that look we think the terms of trade has peaked
but there's definitely more of this mining story to come. What's not happening is that
the sort of multiplier effects of this mining boom are not being transmitted, I guess, to
the broader economy to the extent that most forecasters probably anticipated.
That's been a key change in their thinking, you know over the last couple of months which
is that the mining boom can sort of bubble away in the background. That doesn't necessarily
imply that the rest of the economy is actually going to be running close to capacity.
MICHAEL JANDA: But Michael O'Connor says it'll take more than one small cut to get the construction
sector moving.
MICHAEL O'CONNOR: We're hoping that the Reserve Bank understands that while they need to combat
inflation, they also need to ensure that we have you know as best as possible full employment
in this country and with the way in which the economy's going globally, we hope the
Reserve Bank takes a good lead rather than playing catch up footy.
MICHAEL JANDA: And Brian Redican thinks construction workers and retailers will get their wish.
BRIAN REDICAN: Well we'll definitely get one more interest rate cut over the next couple
of months. So there is a debate about whether it'll be December or February. But the Reserve
Bank has indicated that it's only moved part of the way back to neutral and I think it's
a fairly easy case to make that monetary policy should be only neutral at worst.
The next question will be whether policy actually needs to be on the easy side of neutral to
actually support the housing market and get consumer spending again. But that's a decision
for 2012.
I think eventually they'll have to actually cut rates by around about 1 per cent in total.
So we do think that the Reserve Bank has more work to do.
MICHAEL JANDA: The Australian dollar's fallen about one cent since the decision as currency
traders see more rate cuts ahead.
MARK COLVIN: Michael Janda.