Recession imminent – was the rate cut enough?

The Australian economy is almost certainly now in recession, evidenced by economic growth figures for the final months of 2000 which have slumped sharply into the negative.

December quarter GDP came in at –0.6 percent, indicating a contraction in the economy and prompting doubts over whether the Reserve Bank's 0.25 percentage point cut in interest rates was enough.

With the latest economic indicators on employment and housing suggesting the first quarter of 2001 is perhaps worse than the previous quarter, it appears we may well record two successive quarters of negative growth which would put Australia officially in recession.

Whatever the economic growth outcome this quarter, the rapid decline in GDP last quarter makes certain further interest rate cuts sooner rather than later. predicts we may well see official rates approaching their 4.75 per cent lowpoint of recent decades by the September quarter of 2001. For home loan borrowers, this would mean standard variable interest rates of around 6.5 per cent and the best discounted variable rates on low-frills loans below 6 per cent.

The RBA's latest cut announced today leaves official rates at 5.5 per cent.

Monday's ANZ job ads series showed a sharp 10 per cent fall in February to a 3-year low and is another indication of business confidence in substantial decline post GST. Housing approvals also slipped back in January after showing signs of recovery in December.

For home loan borrowers, the 0.25 percentage point drop in mortgage rates will mean a saving of around $25 per month on a variable, principal and interest loan of $150,000.

However, borrowers who can maintain their loan repayments at January's level, before the February and March rate cuts, will enjoy substantial savings in interest payments and pay their loan off quicker. If rates stayed the same, borrowers would save up to $54,000 in interest and cut their loan term by almost four years.

A recent survey revealed that 79 per cent of borrowers would continue to pay at the old rate and forego the opportunity to have more money in their pockets at the end of the month.