As fears begin to mount that the European sovereign debt crisis is spreading, Australian lenders are finding that their funding costs are rising in response.
May is again likely to be a difficult month for the banks, particularly if they do not follow what is almost certainly going to be a rate cut from the Reserve Bank of Australia as they seek to protect their margins.
Business leaders have put pressure on the central bank to cut interest rates and help the economy get back on the path to growth. What seemed certain just a few days ago, now looks a little less likely after the March jobs report was released, showing the labour market holding steady.
The unemployment rate remained steady at 5.2 per cent, with as many as 44,000 new positions created. Economists had been predicting weak growth of just 5,000 new jobs, arguing the economy remained weak outside the mining sector.
The futures market is pricing in an 81 per cent probability that the central bank will cut the official cash rate by 25 basis points to 4 per cent when it meets in May, less than one week before the budget. Prior to the jobs report, the probability of a rate cut was estimated at 93 per cent by the markets, following fears that a new stage in the European crisis was unfolding.
Richard Goyder, chief executive of Wesfarmers said that the dual speed economy shows no signs of disappearing, and a rate cut would help the economy achieve growth.
“But I do think that the economy could do with some stimulus at the moment and . . . Australia does have some room on monetary policy,” he said.
“Consumers are really concerned at the moment so I would be hopeful that it won’t be too long before we get another interest rate cut.”
” I think it is an important thing to do. I would say not at all costs, not at the cost . . . of a further impost on business that actually grinds the economy down.”