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A big rate cut

The RBA’s bold action has – effectively – challenged Australia’s big four banks – and other lenders – to follow suit.

The central bank’s Governor, Glenn Stevens, said : “this decision is based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected, while inflation has moderated. ”

The government will welcome the decision, as it will lower home loan repayments, if it is passed on.

However the Opposition Leader, Tony Abbott, said before the decision was announced, that a rate cut would indicate that the Australian economy is weak.

The Reserve Bank’s announcement will take its marker rate from 4.25 to 3.75 per cent, from Wednesday.

Mr Steven’s statement is published in full, below:-

“At its meeting today, the Board decided to lower the cash rate by 50 basis points to 3.75 per cent, effective 2 May 2012. This decision is based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected, while inflation has moderated.

Growth in the world economy slowed in the second half of 2011, and is likely to continue at a below-trend pace this year. A deep downturn is not occurring at this stage, however, and in fact some forecasters have recently revised upwards their global growth outlook. Growth in China has moderated, as was intended, and is likely to remain at a more measured and sustainable pace in the future. Conditions in other parts of Asia softened in 2011, partly due to natural disasters, but have recently shown some tentative signs of improving. Among the major countries, conditions in Europe remain very difficult, while the United States continues to grow at a moderate pace. Commodity prices have been little changed, at levels below recent peaks but which are nonetheless still quite high. Australia’s terms of trade similarly peaked about six months ago, though they too remain high.

Financial market sentiment has generally improved this year, and capital markets are supplying funding to corporations and well-rated banks. At the margin, wholesale funding costs have declined over recent months, though they remain higher, relative to benchmark rates, than in mid 2011. Market sentiment remains skittish, however, and the tasks of putting European banks and sovereigns onto a sound footing for the longer term, and of improving Europe’s growth prospects, remain large. Hence Europe will remain a potential source of adverse shocks for some time yet.

In Australia, output growth was somewhat below trend over the past year, notwithstanding that growth in domestic demand ran at its fastest pace for four years. Output growth was affected in part by temporary factors, but also by the persistently high exchange rate. Considerable structural change is also occurring in the economy. Labour market conditions softened during 2011, though the rate of unemployment has so far remained little changed at a low level.

Recent data for inflation show that after a pick up in the first half of last year, underlying inflation has declined again, and was a little over 2 per cent over the latest four quarters. CPI inflation has also declined, from about 3½ per cent to a little over 1½ per cent at the latest reading, as the weather-driven rises in food prices in the first half of last year have, as expected, now been fully reversed. Over the coming one to two years, and abstracting from the effects of the carbon price, inflation will probably be lower than earlier expected, but still in the 2–3 per cent range.

As a result of changes to monetary policy late last year, interest rates for borrowers have been close to their medium-term averages over recent months, albeit tending to increase a little as lenders passed on the higher costs of funding their books. Credit growth remains modest overall. Housing prices have shown some signs of stabilising recently, after having declined for most of 2011, but generally the housing market remains subdued. The exchange rate remains high even though the terms of trade have declined somewhat.

Since it last changed the cash rate in December, the Board has maintained the view that the setting of policy was appropriate for the time being, but that the inflation outlook would provide scope for easier monetary policy, if needed, to support demand. The accretion of evidence over recent months suggests that it is now appropriate for a further step in that direction.

In considering the appropriate size of adjustment to the cash rate at today’s meeting, the Board judged it desirable that financial conditions now be easier than those which had prevailed in December. A reduction of 50 basis points in the cash rate was, in this instance, therefore judged to be necessary in order to deliver the appropriate level of borrowing rates.

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Memo Wayne: You could save $8 billion:ACOSS

Wayne Swan is making no secret of the fact that he is having a tough time pushing next month’s budget into surplus.

And the Treasurer’s opposite number, Joe Hockey, is telling the world that Australia’s finances must not be dominated by the unjustified sense of “entitlement” that he believes too many people have developed.

So both should be at their computer screens early today, closely studying a new report.

Called Waste Not, Want Not” for short it is, indeed, a remarkable document.

Produced by the Australian Council of Social Service, its declared aim is to make room in the Federal Budget for essential services.

And the authors boldly claim that it identifies no less than $8 billion in budget savings.

“Where?” you might hear Mr Swan calling, somewhere towards the back of your imagination.

By tackling “poorly targeted subsidies and tax concessions and clamps down on tax loopholes such as ‘golden handshakes and other shelters, ” ACOSS chief, Dr Cassandra Goldie would reply.

Such as?

Dr Goldie says these include:-

• subsidies for ‘gap fees’
• other private expenditures for health and community services, such as the Private Health Insurance Rebate from ancillary or ‘extras’ cover
• the Extended Medicare Safety Net
•  the Medical Expenses Tax Offset
•  the Education Tax Refund and
•  tax deduction for self-education expenses.

And she adds “A major problem with these rebates is that they mainly benefit people on higher incomes who in relative terms can afford to pay more for these services in the first place.

“The time has come to pare back these programs beyond applying means tests to cap them at very high income levels,” Dr Goldie adds.

Many politicians would agree with Dr Goldie, at least in large parts of her analysis.

But would they follow her advice, especially with an election looming next year?

Dr Goldie also says that tax concessions on superannuation “now cost over $30 billion in lost revenue and adds: “that’s….about the same as our spend on pensions.”

Yet most of the benefit goes to those in the top 20 per cent income bracket, she adds.

There’s a lot more in this report, which was put on the ACOSS website at 5am today.

It’s challenging material.

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Tighter investment rules recommended

Federal authorities may  get new step in powers, to protect investors,  when particular projects strike serious difficulties with infrastructure.

That is one of several recommendations, made by the Council of Financial Regulators, after an inquiry ordered by the Federal government.

The Treasurer, Wayne Swan, published the Council’s report today.

It also recommended:-

*  …New powers to require certain market infrastructure to have key aspects of their operations located in Australia, where deemed appropriate and managed by ‘fit and proper persons,’

*…Strengthened and clarified powers for regulators to give directions to operators of key market infrastructure and impose appropriate sanctions where licensees and their officers fail to comply with directions or licence conditions.

Mr Swan recalled that he had sought advice, on these issues last year, after he had prohibited the acquisition of ASX Limited by Singapore Exchange Limited.

The government will give stakeholders six weeks to comment on the council’s recommendations.

Comments should be sent to the Treasury.

More at www.treasurer.gov.au

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Death of the credit card?

A new technology could make credit cards obsolete.  Read more

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Budget hints? We’ll have some on Thursday

Like to know more about the forthcoming May budget?

If so, watch out for our coverage of a speech the Federal Treasurer, Wayne Swan, will give to the annual conference of the Australian Council of Social Service on Thursday.

It’s bound to contain a few hints.

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A strange sign of strength in Australia’s job market

The number of  “discouraged job seekers” in Australia has fallen sharply.

This development, revealed today, is yet another sign of underlying strength in the Australian job market.

Despite that, many people are still, effectively, locked out of that market.

These include the 90,700 Australians the Bureau of Statistics counts as “discouraged job seekers.’

That is people who want to work, and available to take a job, but have  stopped looking for work, because they believe they would not find it.

They might regard themselves as too old, or without the skills they would need to get a job.

While these people, certainly, are battling, the number of Australians in this unlucky group has, at least, fallen.

The Bureau also reports that, back in 2009, 111,800 Australians were classified as “discouraged job seekers.”

The Statistician’s survey was conducted in September last year.

It showed that 33 per cent of all Australians aged 15 years or more were outside the nation’s workforce at that time.

The Bureau reported that::-

• 60 per cent were women
• 22 per cent wanted to work and
• 16 per cent were aged 15-24.

The Bureau also said that 938,400 Australians had only “a marginal attachment” to the nation’s workforce, at that time.

Almost two thirds were women.

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Australia’s unemployment rises, as part time jobs are lost

An extra 16,400 Australians found themselves out of work last month, pushing the nation’s unemployment rate up to 5.2 per cent.

These seasonally adjusted figures, published by the Australian Bureau of Statistics, compare with an unemployment rate of 5.1 per cent in January.

On trend figures, though, Australia’s unemployment rate is still moving downwards, as it has been since last November.

Trend  figures contain an element of averaging, taken over several months.

However, the Bureau also reported that the number of Australians who actually have jobs fell by 15,400 in February, on seasonally adjusted figures.

Virtually all of these lost jobs involved part time work.

The Bureau said full time employment had been steady in February.

The critically important workforce participation rate fell from 65.3 per cent in January to 65.2 per cent in February

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