Interest rates slashed to fresh record low of 1.5pc by Reserve Bank

The Reserve Bank has cut the official interest rate to a fresh low of just 1.5 per cent, in a desperate effort to stoke price growth.

The RBA last cut its overnight cash rate target in May, taking it to 1.75 per cent, following weak consumer price data in the March quarter.

ABS June quarter inflation data, out last Wednesday, showed consumer prices rose just 1 per cent over the past year, with the Reserve Bank's preferred measure also well below its 2-3 per cent target.

After that release, markets priced the chances of a rate cut as roughly 50-50, but bets had since gone up to a 75 per cent chance of a rate reduction.

The odds were similar when looking at economist forecasts, with 20 of 25 surveyed by Bloomberg expecting a rate cut today.

Most experts expect today's rate cut to be the last, but about a third of the analysts surveyed by financial comparison website Finder are expecting more cuts, with six out of 41 expecting a trough of 1 per cent or less.

Rates could have further to fall


The Reserve Bank sets one cash rate for the nation, but it is simply not appropriate for some states, explains Stephen Long.

Most experts expect today's rate cut to be the last, but about a third of the analysts surveyed by financial comparison website Finder are expecting more cuts, with six out of 41 expecting a trough of 1 per cent or less.

It is a forecast that JP Morgan's Sally Auld agrees with, predicting that rates will remain on hold at 1.5 per cent this year before being cut twice more in the first half of 2017.

Finder's Graham Cooke said it is important for consumers to re-evaluate their current home loan to make sure their bank is passing on the reduction in full.

"If you had a $300,000 mortgage with an average standard variable rate of 4.93 per cent and manage to get the full discount of 0.25 percentage points off your interest rate, this could pocket you almost $50 per month, or a whopping $16,325 over the life of your loan," he observed.

Commonwealth Bank passes on half the cut

However, it appears that the major banks will not pass on all of the Reserve Bank's rate cut, with the Commonwealth Bank lowering its standard variable mortgage rate by only 13 basis points.

That is roughly half of the Reserve Bank's 25-basis-point official rate cut.

CBA's customers will also have to wait more than two weeks to get the benefit of the rate reduction, with it taking effect on Friday, August 19.

In some rare good news for savers, however, CBA is passing on a rate increase of at least 50 basis points to new one, two and three-year term deposits.

Reserve Bank now relaxed about housing market

Perhaps the most notable change to the Reserve Bank's post-meeting statement was its relaxed commentary about the booming east coast housing market.

Seemingly contradicting yesterday's CoreLogic data showing a 9.1 per cent annual surge in Sydney home prices, the Reserve Bank's governor Glenn Stevens said prices "have been rising only modestly over the course of this year".

He also pointed to the boom in apartment construction in east coast cities boosting supply over the next couple of years, presumably in the context that this will put downward pressure on prices.

"Growth in lending for housing purposes has slowed a little this year," Mr Stevens added.

All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished.

Capital Economics, which was last week strongly tipping today's cut as a "done deal", said these comments indicate that the door is open to a 1 per cent cash rate by mid-2017.

"Financial stability concerns won't prevent the RBA from using lower rates to weaken the dollar and boost inflation," the organisation wrote in a note.

From the Opposition benches Treasurer surrendered economic leadership to RBA: Bowen

Federal Treasurer Scott Morrison said the rate cut did not indicate Australia's economy is in trouble.

Federal Treasurer Scott Morrison.   Scott Morrison said it was up to the banks as to how they passed on the rate cut. (ABC News: Nick Haggarty)

"We're growing at 3.1 per cent — I mean, name me five advanced economies that are doing better than that at the moment, and you won't," Mr Morrison told Sky News.

Mr Morrison said it was up to the banks as to how they passed on the rate cut, but noted some already had adjusted their rates.

"Of course we would like to see them pass all of these things on, but what we've seen from at least the two that have made a decision is not the traditional response," he said.

"It's not like they didn't pass it all on and did nothing else. What they've done is they've cut their mortgage rates and they've increased their deposit rates."

Shadow treasurer Chris Bowen criticised the Treasurer for his comments in the lead-up to today's rate decision.

"Scott Morrison has surrendered economic leadership in this nation to the Reserve Bank," he said.

"Today the Reserve Bank has taken action because the Treasurer can't and won't."

Mr Morrison had told the Australian Financial Review that Reserve Bank governor Glenn Stevens was "keenly focused" on inflation and the possible delays in a US Federal Reserve rate hike.

"It is very poor practice indeed for the Treasurer of the day to be speculating about the decision-making of the Reserve Bank in advance, to be speculating and encouraging in affect for the Reserve Bank governor and others to be considering certain matters," Mr Bowen said.

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