RBA cuts interest rates by 25 basis points

Paying heed to the distress calls from Australia's business bodies and retail sectors, the Reserve Bank of Australia (RBA) has slashed the official interest rates by 25 basis points for October.

In what is being described as the closest call in months, the central bank has moved the key interest rates from 3.50 per cent to 3.25 per cent.

Related: How to take advantage of a rate cut

A$ falls after RBA announcement

First bank responds to rate cut

How much will you save

If the banks pass on the rate cut in full, here’s how much you’ll save:

-Repayments on a $100,000 mortgage will drop by nearly $16 a month on average.

-Repayments on a $150,000 mortgage will drop by nearly $24 a month on average.

-Repayments on a $200,000 mortgage will drop by nearly $32 a month on average.

-Repayments on a $250,000 mortgage will drop by nearly $39 a month on average.

-Repayments on a $300,000 mortgage will drop by nearly $48 a month on average.

-Repayments on a $350,000 mortgage will drop by nearly $55 a month on average.

-Repayments on a $400,000 mortgage will drop by nearly $63 a month on average.

-Repayments on a $450,000 mortgage will drop by nearly $71 a month on average.

-Repayments on a $500,000 mortgage will drop by nearly $79 a month on average.

• Assumes 25-year standard variable rate loan at an average new interest rate of 6.6 per cent. (Source - CommSec)

Governor's speech

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 3.25 per cent, effective 3 October 2012.

The outlook for growth in the world economy has softened over recent months, with estimates for global GDP being edged down, and risks to the outlook still seen to be on the downside. Economic activity in Europe is contracting, while growth in the United States remains modest. Growth in China has also slowed, and uncertainty about near-term prospects is greater than it was some months ago. Around Asia generally, growth is being dampened by the more moderate Chinese expansion and the weakness in Europe.

Key commodity prices for Australia remain significantly lower than earlier in the year, even though some have regained some ground in recent weeks. The terms of trade have declined by over 10 per cent since the peak last year and will probably decline further, though they are likely to remain historically high.

Financial markets have responded positively over the past few months to signs of progress in addressing Europe's financial problems, but expectations for further progress remain high. Low appetite for risk has seen long-term interest rates faced by highly rated sovereigns, including Australia, remain at exceptionally low levels.

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Nonetheless, capital markets remain open to corporations and well-rated banks, and Australian banks have had no difficulty accessing funding, including on an unsecured basis. Share markets have generally risen over recent months.

In Australia, most indicators available for this meeting suggest that growth has been running close to trend, led by very large increases in capital spending in the resources sector. Consumption growth was quite firm in the first half of 2012, though some of that strength was temporary.

Investment in dwellings has remained subdued, though there have been some tentative signs of improvement, while non-residential building investment has also remained weak.

Looking ahead, the peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected. As this peak approaches it will be important that the forecast strengthening in some other components of demand starts to occur.

Labour market data have shown moderate employment growth and the rate of unemployment has thus far remained low. The Bank's assessment, though, is that the labour market has generally softened somewhat in recent months.

Inflation has been low, with underlying measures near 2 per cent over the year to June, and headline CPI inflation lower than that. The introduction of the carbon price is affecting consumer prices in the current quarter, and this will continue over the next couple of quarters.

Moderate labour market conditions should work to contain pressure on labour costs in sectors other than those directly affected by the current strength in resources. This and some continuing improvement in productivity performance will be needed to keep inflation low as the effects of the earlier exchange rate appreciation wane.

The Bank's assessment remains, at this point, that inflation will be consistent with the target over the next one to two years.

Interest rates for borrowers have for some months been a little below their medium-term averages. There are tentative signs of this starting to have some of the expected effects, though the impact of monetary policy changes takes some time to work through the economy.

However, credit growth has softened of late and the exchange rate has remained higher than might have been expected, given the observed decline in export prices and the weaker global outlook.

At today's meeting, the Board judged that, on the back of international developments, the growth outlook for next year looked a little weaker, while inflation was expected to be consistent with the target. The Board therefore decided that it was appropriate for the stance of monetary policy to be a little more accommodative.

‘Rate cuts needed before December’

The RBA move should come as a huge relief to the business owners around the country with trading conditions hitting the weakest level in 14 years.

An Australian Chamber of Commerce and Industry (ACCI) investor confidence survey for the September quarter released on Tuesday showed business conditions at 46.4 index points, down from 47.4 points in the previous quarter, prompting calls for a 50 basis points cuts before Christmas.

It's the lowest index level since the survey began in 1998, and remains below the 50-point level separating contraction from expansion.

"It is concerning that the declining trends in trading conditions, sales and profits have seen no sign of rebounding since early 2010," ACCI director of economics and industry policy Greg Evans said in a statement.

This had dampened forward expectations and investment plans, while hiring intentions for the next six months also declined to the lowest in 14 years.

"Further rate relief in the order of 0.50 per cent between now and Christmas is required to assist the mainstream economy," Mr Evans said.

House price surge

However, surging house prices seem to have not influenced RBA’s decision at all. Last month's home price rise across Australia's eight capital cities was the largest in two and a half years, and comes on the back of 125 basis points of rate cuts over the last 12 months.

The RP Data - Rismark home value index shows the price gains were strongest in Adelaide (2.4 per cent), but then broadly spread against the other big capital cities which posted gains between 1.6 per cent (Perth) and 1.1 per cent Brisbane.

Prices in Hobart and the territory capitals all went slightly backwards in the month, while regional houses fell 1.2 per cent (although those rest of state figures only run to the end of August).

RP Data's research director Tim Lawless says the improvement in capital city home prices - which are now up 2 per cent over the past three months - is largely due to interest rate cuts.

"It’s no coincidence that housing market conditions bottomed out at the end of May, after the Reserve Bank cut the official cash rate by 50 basis points," he noted in the report.

"A further cut of 25 basis points in June and the anticipation of further rate cuts in the pipeline appear to have instilled renewed confidence in the housing market which has driven the growth in home values." However, Mr Lawless says the strength in home prices generated by the rate cuts is likely to weigh against the Reserve Bank making further reductions.

Mr Evans said the survey clearly showed manufacturing and construction industries would continue to face "significant headwinds" over the rest of 2012 and into early 2013.

This includes weak consumer demand, a high dollar and increasing global economic turmoil.

Negative retail growth

Australian Retailers Association, the peak retail industry body, said on Monday there has been negative retail growth in all categories in the past two months showing consumers are under budget stress.

Executive director Russell Zimmerman says recent store closures and profit downgrades is a sign the sector is struggling.

"Certainly retail has struggled and that has been well documented.

"We also know that households have just received their first power bill which does incorporate increased costs due to carbon tax and this just adds to the huge range of cost increases consumers are experiencing at the moment."