Rates cut fails to dint household woe

The bank cut its cash rate 0.25 points yesterday in part because of a slowdown in China and turmoil on financial markets. But also central to its decision was a concern that no matter how good the economic news, Australians were scarcely noticing in an atmosphere muddied by campaigning against the carbon tax.

The Melbourne Institute consumer confidence index barely moved after the Reserve Bank cut its cash rate 0.50 points and banks cut their mortgage rates by about 0.35 points in early May. Assessments as to whether now was a good time to buy a major household item went backwards. The survey was taken at about the same time as the government announced extra handouts to families in the May budget.

The Reserve believes lobbying about the carbon tax is acting as a drag on consumer confidence and obscuring the benefit of the income tax cuts that will come into force with the carbon tax on July 1.

The governor's statement published after yesterday's board meeting referred to confidence obliquely, saying that despite modest economic growth and low unemployment, households and businesses continued to ''exhibit a degree of precautionary behaviour''.

If confidence does not lift and the global financial situation worsens, the Reserve will cut rates again. It believes the very low official inflation rate gives it room to do so.

Treasurer Wayne Swan raised the possibility of further cuts yesterday, saying the Reserve Bank had ''further room to move''.

He appealed for Australians to become more confident, saying it was important they understood the economy was strong.

''I know that as Australians watch these events unfold overseas, they get the impression that all of these things are happening in their backyard and perhaps in their economy, but our economy remains strong. We are not immune from these events but Australians can have confidence,'' he said. As news of the rates cut reached homeowners, Jacqui Pulkkinen, of Wanniassa, who chose a fixed rate for half of her home loan, said she wasn't expecting the cut to impact much on her position.

''It might allow me to buy an extra cup of coffee a week, but not much more,'' she said.

Shadow treasurer Joe Hockey said the Reserve had cut rates to ''near emergency levels''.

The Reserve's cash rate stands at 3.5 per cent, just half a percentage point above the low of 3 per cent reached during the global financial crisis. But mortgage rates are nowhere near as low.

During the crisis standard variable mortgage rates slid to 5.75 per cent.

Ahead of yesterday's Reserve Bank cut they stood at 7.05 per cent.

The Bank of Queensland was the first to move within minutes of the Reserve's cut, dashing hopes it would all be passed on to borrowers.

It cut its mortgage rates 0.20 rather than 0.25 points, taking its standard variable rate to 6.91 per cent. Queensland credit union QT Mutual passed on the full 0.25 points.

A cut of 0.25 points would slice a further $48 off the monthly cost of servicing a $300,000 mortgage.

The major banks have yet to respond, with most considered unlikely to pass on the full cut.

Australia Institute researcher David Richardson said each day the big four banks delayed added $6.2 million to their collective profits. The ANZ will announce its decision on Friday.

The National Australia Bank said it stood by its commitment to offer the lowest rate of the big four.

Official advice provided to the Treasurer says the big four can afford to pass on the cut in full.

But muddying the waters is an observation by the Reserve Bank in yesterday's statement that renewed international turmoil is pushing up bank funding costs once more.

The Australian dollar jumped more than US1c on the realisation the Reserve Bank's cut was less than the 0.50 points some had expected and news that G7 finance ministers had called an emergency meeting on Europe's debt crisis.

Futures trading late yesterday assigned an 80 per cent probability to a very big cut of 0.50 points in the cash rate when the bank board next meets on July 3.