Australian Central Bank cuts interest rate

Reserve Bank of Australia follows global counterparts to cut rate to record low of 2.75%

National Australia Bank, Australia’s largest bank by assets, lowered its variable mortgage rate by 25 basis points on Tuesday, after the Reserve Bank of Australia reduced its main cash rate to a record low 2.75 per cent from 3.0 per cent. Photograph: Reuters/David Gray

National Australia Bank, Australia’s largest bank by assets, lowered its variable mortgage rate by 25 basis points on Tuesday, after the Reserve Bank of Australia reduced its main cash rate to a record low 2.75 per cent from 3.0 per cent. Photograph: Reuters/David Gray

Tue, May 7, 2013, 10:27

The Reserve Bank of Australia cut its benchmark interest rate to a record low, driving down a currency that has damaged manufacturing and boosted unemployment.

Governor Glenn Stevens reduced the overnight cash-rate target by a quarter percentage point to 2.75 per cent, saying in a statement that the Aussie’s record strength “is unusual given the decline in export prices and interest rates.”

Eight of 29 economists predicted the seventh cut in the past 19 months, while money markets had seen about a 50-50 chance. “The board has previously noted that the inflation outlook would afford scope to ease further,” Stevens said.

“At today’s meeting the board decided to use some of that scope. It judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy.”

Mr Stevens joins global counterparts in embracing record-low rates in an economy where inflation is contained, mining spending is predicted to crest, and credit growth remains subdued. Stevens is aiming to rebalance growth as mining regions in the north and west thrive and manufacturers in the south and east struggle.

The Australian dollar fell to $1.0199 this afternoon Sydney time, from $1.0238 before the decision. Three-year government bond yields dropped to as low as 2.47 per cent, the lowest level since October 16th. The benchmark S&P/ASX 200 Index pared a loss of as much as 0.7 per cent to close 0.2 per cent.

Three of Australia’s major lenders passed on in full the central bank’s interest-rate cut for the first time in 17 months, sending benchmark home-loan costs to the lowest since 2009.

Commonwealth Bank of Australia, Westpac Banking and National Australia Bank cut their variable mortgage rate by 25 basis points after the Reserve Bank of Australia trimmed the key rate.

Australia and New Zealand Banking Group will review its rates on May 10th.

“Banks’ funding cost has stopped rising, giving them all room to hand out the full RBA cut. It could spur mortgage demand, which is very weak now”, said BBY analyst Brett Le Mesurier.