50 bp rate cut on Tuesday

The cash rate in Australia will fall 50 basis points to 2.75 per cent on Tuesday if Alan Mitchell, economics editor of the Financial Review, is on the money.

For the April 2009 board meeting of the Reserve Bank the market relies, once again, on a newspaper columnist to sort out any confusion over the likely policy recommendation. That there is confusion to sort out is evident in today's AFR, where several other columnists failed to take Mitchell's cue, while the consensus of market economists appears to be that there won't be a cut.

The rate cut announced tomorrow will oblige banks to manage, once again, the politics of increased margins on consumer and business loans.

NAB was one bank to talk of widening margins on home loans over recent weeks, and with this week's rate cut in mind. Other banks with divisional profit targets to meet must wish that NAB sticks to its guns and gives them room to follow.

Not that banks have, according to RBA analysis, added much to margins over the course of the credit crunch.

Ric Battelino, deputy governor of the bank, said in a speech in Brisbane on Tuesday that banks in Australia passed through - in full - the reduction in their cost of funds over the course of late 2008 and early 2009.

Of the 400 basis point reduction in the cash rate since September 2008 the RBA estimates that, overall, all borrowers enjoyed reduction in the cost of their loans by 340 basis points.

The 60 basis point gap was, Battelino said, in line with "movements in interest rates in global capital markets".

Interest rates fell by more than 340 bps on housing loans, Battelino said, while interest rates on some consumer and business loans fell by less.

Some may dispute the RBA's assessment, and practice will vary. The chief difference is treatment of personal and business customers.

Anyone with a business loan can expect more pressure, and earlier, in order to offset the largesse extended to the more numerous retail client base.