The Reserve Bank has cut official interest rates by a quarter percentage point over fears about the international economic outlook.
In a move that caught some analysts by surprise, the RBA board decided to take the official cash rate to 3.25 per cent – its lowest level since the depths of the Global Financial Crisis.
Financial markets had put the chance of a rate cut at 66 per cent before today’s meeting. The same markets have already fully priced in a cut by next month’s Melbourne Cup Day meeting.
Bank of Queensland was the first bank to respond, but failed to pass on the full rate cut.
BOQ said it would reduce its standard variable home loan rate by 20 basis points to 6.71 per cent.
Westpac senior market strategist Damien McColough said the futures market was still forecasting another three rate cuts by the middle of 2013.
“The underlying message from the market is that it is too early to call the end of an easing cycle from the RBA,” he said.
“As of June next year the market is pricing in a cash rate of about 2.4 per cent, which is more than three rate cuts.”
The Australian dollar fell by more than one-third of a US cent after the decision.
The Australian dollar was trading at 103.69 US cents and fell to 103.25 US cents after the announcement.
Treasurer Wayne Swan said the 25 basis point cut in official interest rates is due to “responsible budget policy”.
Mr Swan told said working families and small businesses deserved the cut.
“These cuts have been made possible by our responsible budget policy,” Mr Swan said. “The official cash rate is lower than at any time under the Howard government.”
He said a family with a $300,000 standard variable rate mortgage was now paying $4500 a year less in repayments than when the Liberals left office in 2007.
Mr Swan said slowing growth in China had been a consideration in the RBA decision but it wasn't as dire as some people were projecting.
“We shouldn't forget... whilst China may be growing a little more slowly than people had anticipated, it's doing it from a very much bigger base,” Mr Swan said.
He said the Chinese economy was 40 per cent larger than it was prior to the global financial crisis, meaning even growth rates of seven or eight per cent were “substantial”.
Bank governor Glenn Stevens said that even though the economy was growing around trend, there were signs those parts of the country not tied directly to the mining construction boom were suffering.
He said interest rates for borrowers had been below their medium term averages for a little while with some impact now showing up in the wider economy.
“There are tentative signs of this starting to have some of the expected effects, though the impact of monetary policy changes takes some time to work through the economy,” he said.
“However, credit growth has softened of late and the exchange rate has remained higher than might have been expected, given the observed decline in export prices and the weaker global outlook.
“At today’s meeting, the board judged that, on the back of international developments, the growth outlook for next year looked a little weaker, while inflation was expected to be consistent with the target.
“The board therefore decided that it was appropriate for the stance of monetary policy to be a little more accommodative.”
The decision had an immediate and desired impact, on the Australian dollar which lost half a cent against its US counterpart within minutes of the announcement.
The decision followed new figures from RP Data-Rismark showing a 1.4 per cent increase in capital city house values through September.
In Perth, house values improved by 1.6 per cent while those for units increased by four per cent.
RP Data said previous rate cuts were clearly contributing to an improvement in the housing market.