The Reserve Bank of Australia (RBA) has cut official interest rates by 100 basis points to the lowest level in six and a half years, amid signs of a significant moderation in domestic demand.
The central bank on Tuesday lowered the cash rate to 4.25 per cent, from 5.25 per cent, for the first time since May 7, 2002.
It is the fourth month in a row the RBA has cut interest rates in a bid to head off the impact of slower world economic growth on an already soft Australian economy.
The reduction was more than financial market economists had been expected. Most were looking for a 75 basis point reduction.
However, debt futures markets were more optimistic and had factored in a 100 basis point cut.
RBA governor Glenn Stevens said the bank’s board had judged that a further significant fall in the cash rate was warranted this month to create a more expansionary setting for the economy.
“As a result of today’s decision, the cash rate will be at its previous cyclical low point,” he said in a statement.
“Given trends in money market yields, most lending rates should fall significantly and will also reach below-average levels.”
Commonwealth Bank of Australia Ltd (CBA) and Westpac Banking Corp and National Australia Bank Ltd moved quickly to cut their variable home loan rates within minutes of the RBA move.
CBA and NAB each lowered their standard variable rates by 100 basis points.
Westpac cut its rate by 80 basis points.
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“There has now been a major easing in monetary policy over the past few months,” Mr Stevens said.
“Together with the spending measures announced by the government, and a large fall in the Australian dollar exchange rate, significant policy stimulus will be supporting demand over the year ahead.
“The board will continue to monitor developments and make adjustments as needed to promote sustainable growth consistent with achieving the two to three per cent inflation target over time.”
Mr Steven said Australia’s inflation rate was likely to start to fall soon.
“Global disinflationary forces will assist in this regard, though the depreciation of the exchange rate means that the decline of inflation to the target could take longer than would otherwise have been the case,” he added.
Mr Stevens said the Australian economy had been more resilient than the economies of other countries, some of which had already fallen into recession.
But recent domestic economic data show a significant moderation in domestic demand is occurring.
“With confidence affected by the financial turbulence and a decline in the terms of trade now under way, more cautious behaviour by both households and businesses is likely to see private demand remain subdued in the near term,” Mr Stevens said.
“With that outlook, and with capacity pressures now easing, it is likely that inflation in Australia will soon start to fall.”
Mr Stevens also noted recent falls in global commodity prices and that financial market sentiment remained fragile.
Macquarie Group interest rate strategist Rory Robertson said the RBA had, with its latest cut, reversed some six years of monetary policy tightening in just four board meetings.
“The RBA has reversed some six years worth of monetary tightening - from 7.25 per cent - in just four board meetings over just three months,” he said.
Economists believe rates still have a way to fall, with some looking for a cash rate of 3.25 per cent next year.
(AAP klm)