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Big cut: Interest rates slashed 0.75 per cent

Source: perthnow.com.au
Mark Kenny
November 04, 2008

THE Reserve Bank of Australia has cut its key interest rate by a larger-than-expected 0.75 percentage points to 5.25 per cent following today's monthly board meeting.

Economists had widely tipped a half a percentage point rate cut.

Assuming the rate cut is passed on in full by retail banks, home owners with an average $300,000 mortgage will see a further $150 knocked off their monthly repayments.

The central bank cut the rate by a surprise one percentage point last month to prevent the economy being dragged into a recession in the face of a deepening global financial crisis.

Economic data since then has proved grim reading, pointing to rising unemployment, falling house prices and weak consumer spending.

This is on top of extremely volatile share markets and growing negative superannuation returns.

However, RBA deputy governor Ric Battellino warned last week that the central bank is still concerned about the inflation outlook.

Rate cut means economy is slowing

The good news on interest rates is a sign the economy is faltering.

Markets have factored in a likely cut of 50 basis points - or half a percentage point - a third straight cut this year.

However, with international bank-to-bank lending costs still fluctuating, there is no certainty banks will pass on the full benefits immediately.

If passed on in full, a half percentage point cut would take around $80 off the monthly mortgage repayments of the average home loan of $250,000 over 25 years.

And it would mean homebuyers will have saved in the order of $300 a month since the central bank began its current rate cutting phase.

Another cut of 25 to 50 basis points is possible before Christmas, analysts say. The cuts are expected as the economy showed further signs of a dramatic slowdown yesterday as the global financial crisis continues to bite.

The ANZ's job advertisement survey has suffered a massive 34 per cent slump over this time last year.

The Australian Industry Group's Performance of Manufacturing fell to its lowest level since 1992 prompting widespread fears of a significant leap in the jobless rate.

The Federal Government said it was hoped the banks would pass on the full amount of any interest rate cut.

"We would expect the commercial banks to pass through any official cut in interest rates as rapidly as possible," Prime Minister, Kevin Rudd said.

Treasurer, Wayne Swan was similarly firm. Nationally, house prices dropped by 2 per cent in the past three months - their first fall in three years.

However, South Australia bucked the trend, leading the nation with a strong annual growth of 9.7 per cent.

Mr Swan said the Government was determined to manage the economy in such a way as to promote growth.

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Big cut: Interest rates slashed 0.75 per cent

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