Budget 2015: Reserve Bank cuts interest rates to fresh record low of 2 per cent; Hockey welcomes economic 'fertiliser'

Updated

The Reserve Bank has cut official interest rates by 25 basis points to a fresh record low of 2 per cent, a move which Treasurer Joe Hockey says should stimulate the "green shoots" of the economy.

If passed on in full, the move would save a borrower with a $300,000 mortgage around $47 per month in repayments.

ANZ was the first major bank to pass on the rate cut, lowering its standard variable mortgage rate by 25 basis points to 5.38 per cent, effective this Friday.

The Commonwealth Bank has elected to pass on only 20 basis points of the 25-basis-point cut to its standard variable home loan rate, taking it to 5.45 per cent from Wednesday May 13.

CBA has justified the move by saying that it is actually increasing, rather than cutting, deposit rates, by between 5 and 55 basis points. It has also lowered real estate secured small business loan rates by 25 basis points.

Interest rate monitoring firm RateCity says the lowest-rate discount variable home loans should now drop below 4 per cent for the first time on record.

The majority of economists say they expect the bank to hold off on any more cuts for the rest of the year.

Dollar gains ground after rate cut

While the Australian dollar initially dipped as low as 77.8 US cents very briefly on Tuesday's decision, the currency has since bounced back above where it was prior to the 2:30pm (AEST) announcement.

By 4:30pm (AEST) the Australian dollar was trading at just under 79 US cents.

The RBA had cut rates by 25 basis points in February, but kept the cash rate steady for the past two months despite economist expectations of another cut.

Ahead of Tuesday's meeting analysts expected the Reserve Bank to make this cut and then sit on the sidelines. The majority of experts are tipping the next rate move will be up, but probably not until 2016.

RBA governor Glenn Stevens' statement does nothing to disabuse analysts of this view, dropping the previous month's reference to further rate cuts in the key final sentence.

We know the hurdle to cut further is high. It won't happen until much later in the year. RBC senior economist Su-Lin Ong

"At today's meeting, the board judged that the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand," he said.

What was left out was last month's statement that "further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target", its omission implying that the bank may now be satisfied with its work and moving to a neutral bias.

RBC Capital markets senior economist Su-Lin Ong said the absence of the statement was a firm indication that there would not be more rate cuts over the next few months.

"There is a good chance the cash rate goes below 2 per cent, but we know the hurdle to cut further is high. It won't happen until much later in the year," she told Reuters.

Hockey likens cut to 'fertiliser on green shoots' of economy

Treasurer Joe Hockey likened the rate cut to "fertiliser on the green shoots" of the economy, adding that next week's budget would be "in sync" with the RBA's move to stimulate economic growth.

Mr Hockey also sought to comfort self-funded retirees whose earnings will be cut by the lower interest rates, by ruling out higher taxes on super - an option that had been pushed by social services groups and the Labor Party.

"It is unacceptable to have any increases in taxation on superannuation in the upcoming budget, because now is not the time to hit superannuants who are facing potentially many years of lower returns on their savings in bank accounts," he said.

He said next Tuesday's budget would be "right .. for these times", again indicating the Government would not seek a repeat of last year's surprise cuts and changes.

"Last year's budget was an important budget for its time," he said.

"Every budget needs to be appropriate for the economic circumstances."

The Treasurer called on the Australian people to take advantage of the low rates and borrow more money.

"Whether you be a household or a small business, now is the time to have a go, to borrow some money and to invest, invest in the things that help to create jobs," Mr Hockey said.

The record low rate was declared "good news" by the Treasurer, in a marked departure from his response in opposition when he said a rate cut showed "the economy is struggling".

Labor's spokesman Chris Bowen pointed to the discrepancy, saying Mr Hockey was not up to the job.

"His complete lack of consistency and competence goes to the heart of this Government's challenges when it comes to the economy," he said.

'Growing housing market risks'; Fitch calls for more regulation

A key risk with the current, and any future, rate cut is that it will further boost Australian real estate prices at a time when they are already booming in the biggest market of Sydney and rising strongly in Melbourne.

The Reserve Bank said it is working with other regulators to "assess and contain risks that may arise from the housing market", referring to moves announced late last year to tighten lending standards, particularly for investors.

However, ratings agency Fitch warns that further action is likely to be needed in light of the boost the latest rate cut will provide.

"Growing risks in the housing market and the banks' mortgage portfolios could be exacerbated if further macroprudential scrutiny is not forthcoming," Fitch noted.

"The recent interest rate cut may lead to further house price appreciation, especially in cities such as Sydney and Melbourne, where there has been greater investor activity over the past 12 to 18 months.

"The first rate cut in February 2015 was followed by increased activity in these housing markets."

Fitch suggests that tighter debt-servicing tests for new loans and additional capital requirements for banks would help mitigate risks to the financial system in the event of a housing downturn.

Topics: money-and-monetary-policy, economic-trends, consumer-finance, banking, federal-government, budget, housing-industry, australia

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