Reserve Bank cuts rates to historic low

The Reserve Bank has cut official interest rates to 2 per cent, their lowest level in history.

Following the bank’s monthly board meeting today, it decided to slice a quarter percentage point from official rates.

On a $300,000 mortgage the cut would be worth about $40 a month.

Since the Reserve started cutting rates in 2011, the reduction in interest has been worth more than $110 a week – money the Reserve hopes is being pumped into the wider economy.

ANZ, CBA move on rates ‖ Read RBA Governor Glenn Stevens' full statement

Bank governor Glenn Stevens suggested the stronger Australian dollar, which climbed over the US80 cent mark last week, was a key reason for the cut.

“The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies,” he said.

“Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.”

In a signal this may be the last cut in the Reserve’s current cycle, Mr Stevens gave no indication of further rate cuts.

The governor suggested the economy was showing some positive signs.

“The available information suggests improved trends in household demand over the past six months and stronger growth in employment,” he said.

But the biggest drags on the economy continue to be centred on the slowdown in the mining sector.

“Looking ahead, the key drag on private demand is likely to be weakness in business capital expenditure in both the mining and non-mining
sectors over the coming year. Public spending is also scheduled to be subdued,” he said.

“The economy is therefore likely to be operating with a degree of spare capacity for some time yet.

“Inflation is forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.”