*DJ National Australia Bk: Will Match Any RBA 25-Bp Rate Cut
The NAB have announced they will not retain any of the first 25 point rate cut made by the RBA, and they will pass it on entirely.
This will now lock in a 25 point cut in September and will please the RBA as the decision will avoid, for now, any squabbles between the RBA and the trading banks, re cost of funds, Treasurer Wayne Swan can take some of the credit, as he has turned up the heat this month.
There is no chance the RBA wil now commence with a 50 point rate cut, as bank bills are trading 50 points lower than when the RBA first indicated that rate will fall.
The likely course of action by the RBA will deliver a succession of 25 point cuts, one or two months apart. October cannot be ruled out for the next rate cut, and pricing of key bank bill futures has firmed since the NAB announcement this morning and is supportive of on-going RBA rate cuts this year. Most likely RBA course of action: 25 point cut in Sep, 25 point cut in Oct, and a reasonable chance of a final 25 point cut for 2008, in December.
The prospect of on-going rate cuts should work to maintain the spread of 90 day bank bills to cash at significant lower margins than the 50 points that was the benchmark, prior to the RBA announcing their rate cut cycle, at this month's Board meeting.
the graph below tracks the 9o bay bank bil yield to RBA cash. This peaked at 86 points in early March, and coincided with teh last RBA rate hike. Th spread then declined to about 50 points, for the four months when rates were on hold, and is now at 3 points and reflects interest rate expectations for a cut of 25 in Sep.
If the RBA can continue to suggest on going rate cuts, then the market will be encouraged to support 90 day bank bills and as a result, the 90 day bank bill spread, at, say,around 20/25 points. Cost of funds for trading banks should continue to benefit from the RBA easing cycle.
Kind regards
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