Treasurer Wayne Swan welcomed the RBA's decision, saying "Australians deserve cost of living relief and today that's what they got". The Bank of Queensland was the first bank to react, cutting its standard variable rate by 20 basis points to 6.71 per cent immediately after the RBA's announcement. "Given the continuing pressure on the cost of funding a 20 basis points reduction is the best balance between our customers and shareholders," chief executive Stuart Grimshaw said. The dollar fell to the day's low of $US1.0304, from $US1.0368 immediately before the decision. Global growth risks



The RBA flagged weaker global growth and a high exchange rate as the reason for cutting rates. "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," governor Glenn Stevens said in his accompanying statement. "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. "Key commodity prices for Australia remain significantly lower than earlier in the year, even though some have regained some ground in recent weeks." The door remains open for further cuts.

Mr Stevens also noted that there were first signs that the below-average level of interest rates was beginning to have some of the expected effects on 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," he said. Moody's Economy.com analyst Katrina Ell said the weak global economy drove the RBA to cut rates again, with China's slowdown and its impact on mining key concerns. "The US, Europe and China are key global players and are all on shaky ground," she said. "While the Australian economy has shown signs of improvement in recent months, it is very vulnerable to a downswing in global demand, a heightened risk at the moment." However, Ms Ell believes the RBA is likely to keep rates on hold at the next meeting to allow the lower rates to filter through the economy.

Weakening labour market The RBA also indicated that the labour market had weakened, despite the low jobless rate, currently at 5.1 per cent. "Labour market data have shown moderate employment growth and the rate of unemployment has thus far remained low," Mr Stevens said in his statement. "The bank's assessment, though, is that the labour market has generally softened somewhat in recent months." RBC Capital Markets senior economist Su-Lin Ong said the RBA was rethinking the outlook for the labour market and health of the global economy. "The weaker global outlook is a key driver and it looks like their assessment of the labour market has been revised down," she said. "The door remains open for further cuts."

Lowest rates since GFC

Today's move marks the third cut this year and brings the total official reductions to 150 basis points since November, when the RBA first began its current rate cutting cycle. At 3.25 per cent, official rates are the lowest since October 2009, when Australia was first emerging from the initial effects of the global financial crisis. Rates had fallen to the 49-year low of 3 per cent in 2009 when the central bank was grapping with the first impact of the GFC. JPMorgan economist Ben Jarman said the RBA would likely cut again in December as the domestic economy slows. "The RBA is now putting more weight on the non-resource sector by the looks of it and that's going to require more easing down the track," he said.

"We think the growth numbers in the second half of the year will certainly be softer than the first half of the year and the bias in the unemployment rate will be up, rather than down," said Mr Jarman. "As that news filters through that will justify further easing." The RBA also flagged a nearer end to the mining investment boom than it had previously projected. "Looking ahead, the peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected," Mr Stevens said in his statement. Room for more cuts Most economists had thought the central bank would wait for third-quarter inflation figures due later this month before pulling the trigger.

Still, with core inflation expected to remain near the floor of the RBA's long-term target band of 2 to 3 per cent, markets had assumed further easing was inevitable. "I think they have done the right thing," said Shane Oliver, head of investment strategy at AMP Capital Investors. "The global economy is looking a bit shaky." "We are looking to another 0.25 per cent cut in November, and then another one in February or March next year, taking the cash rate to 2.75 per cent." Interbank futures are fully priced for a move to 3.00 per cent by Christmas. Overnight indexed swaps, which show where the market thinks the cash rate will be over time, have 2.75 per cent inked in on a 12-month horizon. Yields on Australian 10-year bonds are under 3 per cent, so it is cheaper for the government to borrow for a decade than for banks to borrow overnight.

Surplus 'more complicated' Mr Swan attributed the 25 basis point cut in official interest rates to ‘‘responsible budget policy’’. He admitted, however, lower commodity prices and the high Australian dollar would make the government’s task of returning the budget to surplus ‘‘a little more complicated’’. ‘‘The government’s position has been and remains that with an economy that’s growing around trend we should be coming back to surplus,’’ he said. It was important not to lose sight of the fundamental strengths of the economy, he said.

‘‘What we are seeing here is what the government has been putting in place which is a greater capacity for the Reserve Bank to respond with financial policy,’’ he said. Mr Swan said slowing growth in China had been a consideration in the RBA decision but it was not nearly as dramatic as some pundits would have it. Loading ‘‘We shouldn’t forget... whilst China may be growing a little more slowly than people had anticipated, it’s doing it from a very much bigger base,’’ Mr Swan said. with AAP