Interest rates cut by 50 basis points

The Reserve Bank of Australia (RBA) has opted to lower the official cash rate by 50 basis points.

At its monthly board meeting, the RBA decided that due to weaker than expected economic conditions that interest rates should be trimmed to 3.75%

The move is the biggest single change since the global financial crisis that saw the RBA slash rates by 100 basis points (1%) in October 2008, 75 basis points (.75%) in November 2008, 100 basis points (1%) in December 2008, and another 100 basis points (1%) in February 2009.

That knocked the official cash rate down to 3.25%, where things stabilized for a while, hitting a low of 3% in April 2009 when the final crisis cut took place.

Interest rates remained unchanged at 3% until October 2009, when they went up again by 25 basis points (.25%), and continued climbing slowly until hitting 4.5% in May 2010.

The official rate spent most of 2010 unchanged, with a final climb to 4.75% coming in November 2010. This would be the start of a historic hold for the RBA, with the board opting to freeze rates in place 10 consecutive times.

It wasn’t until Melbourne Cup day last year that the RBA cut rates by 25 basis points (.25%), and followed it up with another cut in December to bring the official cash rate down to 4.25%.

Glenn Stevens, Governor of the RBA, pointed to a slowdown in global economic growth, particularly in Europe and the US, as contributing factors to bringing rates down to 3.75%.

“In Australia, output growth was somewhat below trend over the past year, notwithstanding that growth in domestic demand ran at its fastest pace for four years,” he wrote in a statement.

“Output growth was affected in part by temporary factors, but also by the persistently high exchange rate. Considerable structural change is also occurring in the economy. Labour market conditions softened during 2011, though the rate of unemployment has so far remained little changed at a low level.”

Stevens also highlighted a decline in underlying inflation and an easing of weather-driven rises in food prices.

“As a result of changes to monetary policy late last year, interest rates for borrowers have been close to their medium-term averages over recent months, albeit tending to increase a little as lenders passed on the higher costs of funding their books,” he added.

“Credit growth remains modest overall. Housing prices have shown some signs of stabilizing recently, after having declined for most of 2011, but generally, the housing market remains subdued. The exchange rate remains high even though the terms of trade have declined somewhat.”

Roger Gillespie, president of the Australian Retailers Association (ARA), welcomed the news but said that now everyone has to wait with bated breath for the big banks to pass on the cut.

“Over the past couple of months, retailers have paid for the big banks’ greed after they raised interest rates despite the RBA’s hold on the cash rate in March and April,” he said. “However, retailers are today calling on the banks to follow the RBA’s lead and immediately pass on the rate cut in full.

“Retailers are operating in the lower gear of the economy and if the rate cut is passed on in full by the banks, this will go some way to relieve the pressure on a sector operating amid low consumer confidence, a higher Australian dollar, and increased global competition,” added Gillespie.

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