Homebuyers and small businesses have been delivered an early Christmas present by the Reserve Bank which has cut official interest rates by a quarter percentage point.

Following its last meeting of the year, the bank today decided to slice the cash rate to three per cent.

If passed on in full by the nation’s banks, the cut will shave about $46 a month from a $300,000 mortgage.

It is the first time since early October 2009 that the Reserve has taken official rates to three per cent.

At that time, the cash rate was at a 50-year low with the economy was in the early stages of recovering from the Global Financial Crisis.

The three percent rate setting was described by the Reserve as an “emergency” level.

Bank governor Glenn Stevens said today that while there were some positive signs out of China, Australia’s biggest export market, domestic conditions were tough for those outside of mining.

The jobs market was softening, unemployment was pushing up, which would help keep inflation in check.

He said while monetary policy was accommodative, there was scope to ease cost pressures further.

“There are signs of easier 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 said.

“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.

“This will help to foster sustainable growth in demand and inflation outcomes consistent with the target over time.”

Mr Stevens said private spending was likely to improve but it would not match the levels seen before the GFC.

There were some signs of an improvement in the housing market but they were only tentative.

Prime Minister Julia Gillard urged the banks to pass on the rate cut to its mortgage customers.

“It is very close to Christmas and so if an interest rate reduction is made, the banks should take into account that Australian families will be looking to them to pass the interest rate reduction on in full,” she said ahead of the announcement.

Also weighing on the overall economy is the Gillard Government’s press to bring the Budget back into surplus.

New figures from the Australian Bureau of Statistics showed Government consumption fell by 0.4 per cent in the September quarter with public investment down by 8.2 per cent.

Combined, they will shave about half a percentage point from tomorrow’s September quarter GDP result.

The West Australian

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