Rate cuts selective for now

In a decision that reinforces the increasingly grim outlook for economic growth worldwide and the medium-term damage caused by the credit crunch, the Reserve Bank of Australia yesterday surprised essentially all the pundits with a cut of one percentage point in the cash rate target to 6.0 per cent.

The reason given by the RBA - in the context of rising inflation, albeit with expectations that inflation will fall soon enough - was that "an unusually large movement in the cash rate was appropriate in order to bring about a significant reduction in costs to borrowers."

As of this morning the only category of borrowers to receive news of any cut in their variable interest rates was home loan customers.

With Westpac taking the pricing lead, the five largest banks cut variable rate home loans by 80 basis points.

In the five weeks since the RBA cut the cash rate target by 25 basis points to 7.0 per cent in early September few banks have cut business overdrafts, personal loan or credit card rates. All the benefit of last month's cut in the cash rate was confined to borrowers with home loans.

Banks are plainly under pressure to cut business rates and other consumer rates on this occasion, though how they balance those expectations with satisfying the perceptions of credit investors offshore over profitability and liquidity will be a delicate task.

National Australia Bank yesterday published a review of its funding costs in its Australian bank. NAB said that its "total funding cost premium to the RBA cash rate" was 96 basis points as of early October 2008, up from 58 basis points in the period August to October 2008 and 53 basis points in the first year of the crisis.