Reserve Bank cuts rates by 75 basis points

The Reserve Bank of Australia (RBA) has delivered a pre-Christmas bonus to homeowners with a 75 basis point cut in official interest rates.
The cut, which was bigger than expected, takes the cash interest rate to 5.25 percent, and will shave around $175 per month from repayments on a $350,000 home loan. The official rate has not been at these levels since December 2003.
Treasurer Wayne Swan welcomed the RBA's decision and said that people with the average mortgage had saved more than $400 per month since the current round of rate cuts began.
Besa Deda, chief economist at St George Bank said the cash rate could fall to 4.25 percent. "The longer the credit crisis grips financial markets, the bigger are the downside risks to the world and domestic economies, and therefore, the more easing the RBA will need to do to try to cushion the economic downturn," she said.
Commonwealth Bank lowered its variable rates by 0.58 percent just minutes after the RBA move. The bank's head of retail bank services, Ross McEwan, claimed the bank could not pass on the whole RBA cut. "Unfortunately, as a result of a significant increase in all three elements of our cost of funding over recent weeks, we have not been able to pass on the full amount of this latest decrease in interest rates," he said. "Raising long term funds remains extremely difficult and expensive."
The Reserve Bank's decision comes as the Australian economy begins to slow. House prices are falling at rates not seen since 1977, retail spending has plummeted and the number of jobs being advertised has also fallen.
RBA governor Glenn Stephens said the turmoil in international markets and weakening economies globally had aided the decision to slash rates again.
"In Australia, the overall path of economic activity appears until recently to have been close to what the Board had expected, with a needed moderation in demand occurring after a period of earlier strength," he said. "Recent reductions in borrowing rates, the depreciation of the exchange rate and the fiscal stimulus announced in October will work to assist growth in the period ahead, but deteriorating international conditions and falling commodity prices will have a dampening influence."
All eyes will now be on the remaining commericial banks and whether they match the RBA's cut by dropping variable home loan rates by 75 basis points.
How much will you save?Your say: are lower rates easing the pressure?
Housing industry lobby group the Housing Industry Association (HIA) said the big cut would encourage more first-time buyers into the housing market. "The interest rate cuts to date, with more potentially to follow, provide an opportunity for many Australians to enter the home ownership market for the first time,” Chris Lamont, HIA's policy chief, said.
Beyond today's cut, opinion is divided on the future outlook for interest rates. Inflation may be showing tentative signs of easing, but it remains high and that may be enough to limit the scope for further rate cuts. The market is pricing in a cash rate of 3.75-4.25 percent by mid next year, but some believe that is optimistic.
"After today’s surprise move, the market now has more than fully priced another 75bpt cut for December," said Michael Blythe, chief economist at Commonwealth Research. "We don’t see the RBA validating this very aggressive pricing. We expect a further 25bps worth of cuts by year end taking the cash rate to 5 percent, and then a pause. If the global economy continues to weaken then the RBA will cut again in 2009."

By Stuart Fagg, ninemsn Money, November 4, 2008