Reserve Bank cuts interest rates to new historic low of 1.75pc

The Reserve Bank of Australia has moved to head off fears about deflation, cutting its official cash rate by 25 basis points to a historic low of 1.75 per cent.

It is the first change in interest rates since May last year, when rates were cut 25 basis points to 2 per cent.

Before the decision, the market had priced in roughly a 50 per cent chance of a cut after last week's surprisingly weak inflation figures.

Key to the decision was the reading of core inflation — the RBA's preferred measure — at 1.5 per cent, the lowest reading on record and well below the target band of 2 to 3 per cent.

If the 25 basis point cut was fully passed on to home loans by the banks, it would equate to a $43-a-month saving on a typical 25-year $300,000 mortgage.

The Australian dollar immediately tumbled 1 per cent to below 76 cents against the US dollar in response to the cut.

In a statement accompanying the decision, RBA governor Glenn Stevens pointed to the unexpectedly weak inflation data as the reason behind the move.

"While the quarterly data contain some temporary factors, these results, together with ongoing, very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast," Mr Stevens said.

Mr Stevens said the board took into account developments in the housing market and the impact a tougher regulatory stance was having on keeping a lid on prices.

"At present, the potential risks of lower interest rates in this area are less than they were a year ago," he said.

The RBA also noted that while the global economy continued to grow, the growth was at a slower pace than expected and forecasts had been revised down further.

"Sentiment in financial markets has improved, after a period of heightened volatility early in the year," Mr Stevens said.

"However, uncertainty about the global economic outlook and policy settings among the major jurisdictions continues.

"Funding costs for high-quality borrowers remain very low and, globally, monetary policy remains remarkably accommodative.

"Taking all these considerations into account, the board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting."

 

At present, the potential risks of lower interest rates in this area are less than they were a year ago.

Taking all these considerations into account, the Board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting.

NAB immediately passes on full cut

The move had an immediate impact on commercial banks, with NAB passing on the full 25-basis-point cut, taking its standard variable home loan from 5.60 per cent to 5.35 per cent.

Investment loans will drop from 5.75 per cent to 5.50 per cent, while business loans will also be cut by 25 basis points.

NAB personal banking group executive Gavin Slater said in making the decision to change interest rates, the bank considered a range of factors.

"The circumstances of each decision will always vary, and we must take into account factors such as competition, regulatory capital requirements, and funding costs," Mr Slater said.

Likely to be followed with another cut: ANZ

Capital Economics economist Paul Dales said the RBA's move will help solve the economy's twin problems of too slow growth and too low underlying inflation.

"The RBA cut rates not just because underlying inflation has been low, but because the weaker economic outlook and stronger dollar means that it will remain low this year and next," Mr Dales said.

ANZ's Felicity Emmett said the cut rates will keep a lid on further appreciation in the Australian dollar, and increases the likelihood that we have seen its peak, although it is not necessarily a trigger to take it down to 70 US cents.

"This is unlikely to be a 'one-and-done' cut," Ms Emmett said.

"The RBA nearly always follows up with another cut and we expect this time to be no different."

Australian bonds market 'on fire', expects more rate cuts

The Australian bond market is rallying after the Reserve Bank cut the official interest rate to a fresh record low. 

RBC senior economist Su-Lin Ong told AAP the rate cut was driven by a reassessment of the inflation outlook following a weak first quarter CPI read. 

“The bond market is on fire post the rate cut,” Ms Ong said. “The rate cut really spurred the bond market and while there is not a lot of forward guidance you would have to think a persistent undershoot of the inflation target would see further cuts. 

“We’re very much in the camp of further cuts likely.” 

At 5:49 pm Australia’s biggest lender, the Commonwealth Bank, has announced it would cut its standard variable home rate by 25 basis points to 5.35 per cent, effective from May 20. 

Minutes earlier, Westpac said it would cut its standard variable rate, also by 25 basis points, to 5.43 per cent, from May 23. 

But the National Australia Bank was the first cab off the rank, announcing it would cut its variable mortgage rates by 0.25 percentage points, to 5.35 per cent. 

That cut, effective from May 16, will trim about $47 from the average monthly repayment on a 30-year $300,000 mortgage.

 

The Reserve Bank's decision in full

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.75 per cent, effective 4 May 2016. 

This follows information showing inflationary pressures are lower than expected.

The global economy is continuing to grow, though at a slightly lower pace than earlier expected, with forecasts having been revised down a little further recently.

While several advanced economies have recorded improved conditions over the past year, conditions have become more difficult for a number of emerging market economies.

China's growth rate moderated further in the first part of the year, though recent actions by Chinese policymakers are supporting the near-term outlook.

Commodity prices have firmed noticeably from recent lows, but this follows very substantial declines over the past couple of years. Australia's terms of trade remain much lower than they had been in recent years.

Sentiment in financial markets has improved, after a period of heightened volatility early in the year. However, uncertainty about the global economic outlook and policy settings among the major jurisdictions continues.

Funding costs for high-quality borrowers remain very low and, globally, monetary policy remains remarkably accommodative.

In Australia, the available information suggests that the economy is continuing to rebalance following the mining investment boom.

GDP growth picked up over 2015, particularly in the second half of the year, and the labour market improved. Indications are that growth is continuing in 2016, though probably at a more moderate pace. Labour market indicators have been more mixed of late.

Inflation has been quite low for some time and recent data were unexpectedly low. While the quarterly data contain some temporary factors, these results, together with ongoing very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast.

Monetary policy has been accommodative for quite some time. Low interest rates have been supporting demand and the lower exchange rate overall has helped the traded sector.

Credit growth to households continues at a moderate pace, while that to businesses has picked up over the past year or so.

These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.

In reaching today's decision, the Board took careful note of developments in the housing market, where indications are that the effects of supervisory measures are strengthening lending standards and that price pressures have tended to abate.

Sources ABC News Twitter and Reserve Bank Of Australia

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