Reserve Bank cuts rates to fresh low of 2.25 per cent

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THE Reserve Bank has cut official interest rates to a new low in a decision that paves the way for the cheapest home loans in more than 40 years, a weaker Australian dollar and further increases in house prices.

RBA governor Glenn Stevens said in a statement following the decision that the Australian economy was growing at a below trend pace and was likely to remain so for quite a while longer, while unemployment would peak a little higher than previously expected.

“The board judged that, on balance, a further reduction in the cash rate was appropriate,” he said.

“This action is expected to add some further support to demand, so as to foster sustainable growth and inflation outcomes consistent with the target.”

Commodity prices had continued to decline, in some cases sharply, the governor said.

“The price of oil in particular has fallen significantly over the past few months. These trends appear to reflect a combination of lower growth in demand and, more importantly, significant increases in supply.

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MORERate cut unlikely to fuel price surge
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“The much lower levels of energy prices will act to strengthen global output and temporarily to lower CPI inflation rates.”

The Australian dollar dropped sharply to a five-and-a-half year low of US76.50c versus US78.03c immediately after the announcement at 2:30pm (AEDT) and the benchmark S&P/ASX 200 share index rose to a six-and-a-half year high of 5698.

While the Australian dollar has declined noticeably against a rising US dollar in recent months, “it remains above most estimates of its fundamental value, particularly given significant declines in key commodity prices,” and “a lower exchange rate is likely to be needed to achieve balanced growth in the economy,” the RBA said.

LENDING: Smaller banks move quickly to pass on cut

Significantly, the central bank gave no hint of further interest rate cuts, saying only that “this action is expected to add some further support to demand, so as to foster sustainable growth and inflation outcomes consistent with the target”.

Returning from a two-month summer break, the RBA board ended a mounting frenzy of speculation over whether interest rates should, or would, be cut, choosing to end a period of interest rate stability that had seen official rates at 2.5 per cent for the 17 months, since August 2013.

Economists still expect the bank to cut rates at least one more time this year.

“We hope lenders will pass on the full rate cuts and more to their variable rate home loan customers because there’s no excuse not to pass on the full cuts. Lenders have kept 0.45 percentage points on average of cash rate cuts from variable rate home loan customers since the cash rate began to fall in November 2011,” said Michelle Hutchison, an analyst at Finder.com.au.

Few were expecting an interest-rate cut only a week ago, citing the RBA’s December statement that “a period of stability in interest rates” was the most likely course. But an article by veteran Herald Sun finance commentator Terry McCrann last Thursday — who has accurately predicted more than half of the RBA’s interest rate moves since the GFC — moved expectations dramatically in the direction of a rate cut.

This morning markets were pricing in a 60 per cent chance of a 25 basis point interest rate cut today, up from below 10 per cent last Wednesday.

With AAP


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