Home owners around the country exhaled in unison in response to the one percent cut to the official cash interest rate announced by the Reserve Bank of Australia at its December meeting, taking the official cash rate to 4.25 percent.
While many economists were predicting a 0.75 per cent cut, I must admit I was leaning toward 1 per cent after sitting next to Reserve Bank Governor Glen Stevens at a dinner in Melbourne a couple of weeks ago. Like most of us he seemed a little shell shocked at the collapse of global sharemarkets and economies in Europe and the US.
I reckon he has seen how quickly overseas economies have deteriorated (even China) and is determined to be pre-emptive here to make sure we don't follow suit.
Anyone with a home loan has enjoyed a two percent fall in interest rates since the RBA started cutting rates in March 2008. This should really have taken the heat off many Australian families and delivered a genuine boost to the household coffers, just in time for Christmas.
In fact, rapidly falling interest rates coupled with the sharp fall in petrol prices should be just the boost most families are looking for after what has been a difficult year by anyone's measure.
Now the banks have to deliver their side of the bargain. They've kept a bit of the last 3 rate cuts for themselves because of the turmoil in global money markets. I can sort of understand their arguments. But this time round there is no excuse for them not to pass on the full one per cent cut to home mortgage rates.
And, just as importantly, they must pass it on to credit card rates and small business loans. Rates in these areas are nothing short of extortionate. Credit card interest rates averaging 20 per cent are a scandal, and very little of previous rates cuts have been passed on to overdrafts or other business loans.
The effect
The drop in interest rates isn't just good news for Australian families, it's also good news for the economy as a whole. It means companies with debt obligations will be paying lower interest charges, which should help stimulate economic growth.
The interest rate cut should also help re-start the share market. This is because as the interest rate drops, investments in cash become less attractive and other asset classes like equities become more attractive. Although the government's guarantee of bank deposits will dampen this affect to some extent as investors seek to keep their assets as safe as they can.
Of course, interest rates are not the only factor affecting share markets at the moment - lack of investor confidence is the other major variable that is driving the share market down. So although the rate cut should stimulate some short-term resilience in the share market, other factors may work to keep its value down.
Consumer confidence, on the other hand, will really get a boost thanks to the rate cut, which should also help fire up the economy. The argument goes interest rate cuts deliver extra dollars to households with mortgages and other loans, which can be spent on goods and services, thus stimulating the economy.
But this can only happen if the major banks decide to pass on the rate cut to consumers. It's likely the major banks will pass the majority of the rate cut on, but not the full cut.
The result
The good news is that's not all folks - it's likely there will be more rate cuts in 2009 to kick start our sluggish economy. Some economists are predicting interest rates to fall as low as two percent, although most expect the official cash rate to dip to about 3.5 percent (keeping in mind the official cash rate has never fallen below 4.25 percent since the RBA started disclosing the official cash rate).
Further rate cuts should really take the pressure off ordinary Aussies and will hopefully mean a brighter outlook for 2009 than the annus horribilis of 2008.