The National Farmers Federation has welcomed Tuesday's announcement by the Reserve Bank of Australia that interest rates will be cut by a further 25 basis points.
NFF president Jock Laurie said the reduction in interest rates, taking the cash rate to three percent for the first time since April 2009, was welcome news for the agricultural sector at a time when the agricultural boom is sharply in the spotlight.
Analysts yesterday said the rate cut should boost consumer spending by $1.6 billion in the next six months, including the crucial pre-Christmas retail period. The average home-owner will save $50 a month on their mortgage.
Analysts said the major banks' funding pressures had eased in recent months, giving them breathing space to 'be more generous' in passing-on the full amount to lenders.
“What we’ve seen over the last few months is a real focus on the future financial and investment potential of Australian agriculture,” NFF's Jock Laurie said.
“And while there is a very positive future outlook for farmers and for agriculture – particularly in light of the Government’s focus on the Asian century – in order to capitalise on the future opportunity, we must ensure farmers are in a stable financial position in the here and now,” he said.
“Today’s interest rate cut to 3pc means farmers will be better placed to meet their financial obligations. It is also good news for farmers as it means less pressure on the Australian dollar, which is currently sitting at US104c after reaching highs of US110c last year.
“We know that every 1pc appreciation in the Australian dollar pushes our farm income down by around $220 million in raw terms, due to our high reliance on export markets. So a weakening Australian dollar and an interest rate cut, combined, spell good news for the sector,” Mr Laurie said.
He said the NFF now awaited the reaction of the banks to this rate cut with interest.
The NFF’s Agribusiness Loan Monitor, which tracks the movements of financial lender’s agribusiness loans against the official interest rate, would show which banks, if any, have followed the RBA’s lead this month.
The Monitor is compiled each month by leading money market monitor, Canstar, and published by the NFF as a tool for all Australian farmers. The next update will be released in mid- December
“The November Loan Monitor showed that eight banks have made some reduction in their rates since the October RBA rate cut, however of these, only one bank – BankWest Agribusiness – has passed on the full 25 basis points, and then only to their agricultural overdraft customers,” Mr Laurie said.
“We urge all financial lenders to pass the benefit of today’s rate cut on to farmers, to help promote and stimulate future growth in the agricultural sector,” he said.
Shadow Treasurer Joe Hockey said while yesterday's rate cut might provide short-term relief, Australia faced 'huge challenges' through low business and consumer confidence.
Australian Bankers' Association: Why banks don't always follow Reserve
When the Reserve Bank Board cuts the cash rate, it does not mean the Reserve Bank always expects banks to follow, according to Steven Münchenberg, Chief Executive of the Australian Bankers’ Association (ABA).
“There’s always speculation regarding individual banks’ pricing decisions on loans and deposits at this time," Mr Munchenberg said.
“The ABA is not involved in pricing decisions on loans and deposits. Banks make their individual pricing decisions based on a range of factors.”
“However, the ABA is always asked to comment on funding costs across the industry because it is one of the factors which influence banks’ pricing decisions.”
In the recent Statement on Monetary Policy, the Reserve Bank noted:
“Bank funding costs – relative to the cash rate – have risen by about 50 basis points over the past year,….. The rise in bank funding costs relative to the cash rate over the past year largely reflects the increased cost of deposits.”
Mr Münchenberg said: “The Reserve Bank cash rate has reduced 150 basis points since November last year, but with banks, credit unions and building societies facing real funding cost pressures, not all of that has been passed on. The Reserve Bank calculates that the major banks have cut standard variable home loan rates by an average of 115 basis points.”
“For small business lending backed by residential security, banks have passed on more of the cash rate cuts, reducing the average loan by up to 120 basis points.”
“While the Reserve Bank has identified that average funding costs have increased by 50 basis points, banks have only passed on 30 – 35 basis points to most home and small business borrowers.”
“At the same time, banks have only passed on about half the cash rate cuts to savers with term deposits.”
“The Reserve Bank understands the cash rate is just one component of the true cost of banks’ funding and therefore does not expect banks and other lenders to exactly match every cash rate movement.”
“The Reserve Bank Board takes into account what borrowers are actually paying in the marketplace for loans and what they are receiving on deposits when making their decision.”
“Banks are facing higher funding costs mainly due to the competitive rates being paid on deposits.”
“Prior to the GFC, term deposits were priced on average 200 basis points below the cash rate. Now, they are 20 basis points above the cash rate.”
“While interest rates on deposits remain attractive and competitive for savers, when combined with the cost of wholesale funding, deposits continue to put pressure on the overall cost of funds for banks.”
“My advice to customers when it comes to home loans, shop around because there is a very competitive mortgage market in Australia – banks routinely offer discounts of around 70 basis points off the advertised standard variable rate to approved customers.”
The full results of the November NFF Agribusiness Loan Monitor are available via the publications page on the NFF website: www.nff.org.au