RBA cuts interest rates by 0.25pc to 3pc

Adam Creighton
December 04, 2012
The Australian

THE Reserve Bank of Australia has cut official interest rates to 3 per cent, a level not seen since the global financial crisis, on fears that Australia’s economy is deteriorating.

In its final meeting for 2012, the central bank’s board cut the cash rate by 25 basis points in an attempt to kickstart economic activity outside the mining sector as the resource boom begins to peter out.

Not since April 2009 has the Reserve Bank cut the cash rate to such a low level.

Economists were almost unanimous the central bank would cut rates today, following news last week that resource firms were cancelling resource projects and becoming increasingly reluctant to fund new ones, spooked by rising costs and an uncertain outlook for commodity prices.

Yesterday, separate data showed that company profits, wages and salaries had fallen during the three months to September. Retail sales over the month to October, meanwhile, were flat, as spending on discretionary goods slumped, offset by a rise in spending at supermarkets.

Despite continued rate cuts, the Australian dollar remains above parity with the US dollar, and questions marks remain over Europe’s currency union and America’s economic growth as it approaches a ‘fiscal cliff’ of heavy tax cuts and billions of dollars of government spending next month.

Australia’s jobs growth remains too low to keep the unemployment rate steady, and most economists expect the jobless rate to rise from 5.4 per cent in October to nearer to 6 per cent by the middle of next year. November’s unemployment rate is released on Thursday.

The Reserve Bank surprised economists and kept rates on hold last month, citing an unexpected increase in consumer price inflation. Underlying inflation rose to the middle of the Reserve Bank’s 2 per cent to 3 per cent target range, and the RBA expects inflation to continue rising next year.

Attention now turns to how much of the rate cut banks will pass on to mortgage holders. As of today the Reserve Bank has cut the official rate by 1.25 percentage points since May, while mortgage rates have fallen around two thirds as much.

Prime Minister Julia Gillard said earlier today that the banks should pass on any interest cut made today in full to borrowers.

“Banks should take into account that Australian families will be looking to them to pass the interest rate reduction on in full,” she said. “Even with the resilience of our economy, many families find it difficult to make ends meet.”

Despite today’s cut, financial markets are still pricing in a further one or two interest rate cuts for the next year.