Reserve Bank Cuts Interest Rate


The Reserve Bank (RBA) has lowered interest rates to 3 per cent, the same level as at the peak of the financial crisis.

The 25-basis-point rate cut means the official cash rate target is at its equal lowest level since the RBA was granted independence in setting monetary policy and started targeting inflation.

A rate cut was expected by economists, with 20 out of 28 economists surveyed by Bloomberg forecasting the move, and financial markets having priced in more than a 90 per cent chance of a rate cut.

Some market participants must have been betting on a cut of 0.5 per cent, with the Australian dollar rising from 104.1 US cents around the time of the decision to 104.6 US cents shortly after, despite rates going down.

The Reserve Bank’s governor Glenn Stevens again chose to highlight the strength of the local currency as a factor in the RBA’s thinking.

“There are signs of easier [interest rate] conditions starting to have some of the expected effects, though the exchange rate remains higher than might have been expected, given the observed decline in export prices and the weaker global outlook,” he noted in his post-meeting statement.

“While the full effects of earlier measures are yet to be observed, the board judged at today’s meeting that a further easing in the stance of monetary policy was appropriate now.”

Mr Stevens highlighted ongoing weakness in European economies, as well as concerns about the fiscal cliff in the US posing risks to that country’s recovery, and ongoing uncertainty about the pace of Chinese economic growth.

However, it is a weaker-than-expected domestic economic outlook that appears to have triggered the latest rate reduction, including state and federal government budget cuts.

“Recent data confirm that the peak in resource investment is approaching,” Mr Stevens observed.

“Available information suggests that the near-term outlook for non-residential building investment, and investment generally outside the resources sector, remains relatively subdued. Public spending is forecast to be constrained.”

The Reserve Bank is hoping that lower interest rates will help boost a nascent home building recovery, but without excessively stoking real estate prices.

The RBA expects inflation will remain within its 2-3 per cent target range over the next year or two, giving it the scope to cut rates now, but warned that productivity would have to improve and wage growth remain slow to allow rates to remain low.

The rate reduction will take just under $50 a month from repayments on a $300,000 25-year mortgage, if it is passed on in full by financial institutions.

Source: ABC News

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