The Reserve Bank has cut the cash rate to its lowest level since the global financial crisis, following a raft of weak economic data that showed pessimism in the jobs market, a slowdown in mining activity and lower-than-expected retail sales.
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The RBA cut the cash rate by 25 basis points, or 0.25 percentage points, to 3 per cent, which is the lowest the rate has been since the central bank started setting rates in 1990.
It matches the setting in April 2009 at the peak of the GFC, when the global financial system was in meltdown and the RBA was trying to prevent Australia slipping into recession.
The Reserve Bank has now lowered its key cash rate by altogether 175 basis points since it embarked on the current cutting cycle in November 2011.
Reserve Bank governor Glenn Stevens said in a statement that while the full effects of earlier cuts were yet to be observed, ‘‘the board judged at today's meeting that a further easing in the stance of monetary policy was appropriate now’’.
‘‘This will help to foster sustainable growth in demand and inflation outcomes consistent with the target over time.’’
Banks hold back
All eyes will now turn to the big banks and whether they pass on the rate cut in full. The chief executive of the Australian Bankers’ Association (ABA), Steven Munchenberg, signalled this morning that higher funding costs meant banks would not always pass on cuts in full.
‘‘Banks are facing higher funding costs mainly due to the competitive rates being paid on deposits. Prior to the GFC, term deposits were priced on average 200 basis points below the cash rate. Now, they are 20 basis points above the cash rate,’’ he said.
‘‘While interest rates on deposits remain attractive and competitive for savers, when combined with the cost of wholesale funding, deposits continue to put pressure on the overall cost of funds for banks.’’
The first bank to announce a cut to its mortgage rates, just minutes after the RBA decision, was Bank of Queensland, but the lender held onto 5 basis points, reducing its standard variable mortgage rate by just 20 basis points to 6.51 per cent.
Chief executive Stuart Grimshaw said BoQ was conscious of the pressures facing all customers at this time of year, including those with home loans and those with deposits, and believed the 20 basis points cut "would strike a fair balance between the two".
Risks on the downside
Mr Stevens said global growth was forecast to be slightly lower for some time, with risks to the outlook still seen to be on the downside due to the crisis in Europe and continuing fiscal cliff discussions in Europe.
‘‘Recent data suggest that the US economy is recording moderate growth and that growth in China has stabilised. Around Asia generally, growth has been dampened by the more moderate Chinese expansion and the weakness in Europe,’’ he said.
The dollar rose more than a quarter of a US cent to as high as $US1.0455 in the minutes after the decision.
The rate cut was mostly expected by economists, who cited the softening mining sector and the continued moderating of the Australian economy as reasons why the Reserve Bank would move to lower rates.
The recent data showed company profits falling 2.9 per cent in the third quarter, a drop of 0.2 per cent in wage and salary payments in the September quarter, a 2.9 per cent reduction in job advertisements in November, flat retail spending in October and flat house prices in November.
'Good news for families'
While interest rates are at the same level as they were during the financial crisis, federal Treasurer Wayne Swan said in a press conference after the RBA annnouncement that Australia's economic conditions were vastly different.
Citing Mr Stevens' statement, he emphasised that the conditions in the economy this year were running close to trend.
Mr Swan said the cut was an "early Christmas present that hardworking Aussies deserve".
"When you have an interest rate cut, that's good news for families and good news for business," he said.
The Treasurer said the cut was a result of the government economic management, strong budget management and contained inflation.
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