Interest rates cut: Reserve Bank slices official cash rate by 25 basis points for first time in 18 months

Updated

The Reserve Bank has cut interest rates for the first time since August 2013, reducing the official cost of borrowing by 25 basis points.

The move takes the cash rate down to 2.25 per cent, a record low since the Reserve Bank gained independence and started targeting inflation in the 1990s.

The official cash rate target had been steady for 17 months prior to today's decision, the equal longest period of rate stability since an 18-month run in the mid-1990s.

Money market traders had bet on a cut, pricing in a 60 per cent chance of rates falling this month ahead of today's meeting, although only seven out of 29 economists surveyed by Bloomberg forecast today's move.

The post-meeting statement by Reserve Bank governor Glenn Stevens revealed that a desire to lower the already-falling currency was the main factor behind the move away from rate stability.

On the dollar, the bank noted it had declined "noticeably" against a rising greenback, but by less against a wider basket of foreign currencies.

"It remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices," Mr Stevens said.

"A lower exchange rate is likely to be needed to achieve balanced growth in the economy."

At least in the short term, Mr Stevens got his wish, with the Australian dollar plunging more than 1.5 cents from 78.18 US cents immediately before the decision to 76.51 shortly after at 2:52pm (AEDT).

The RBA decision also saw the benchmark ASX 200 jump around 30 points almost instantly after 2:30pm, with the index 1.3 per cent higher at 5,700 by 3:36pm on lower rates and a weaker currency.

Housing market concerns

The biggest concern many economists had with a rate cut was that it may stoke an already-buoyant housing market, which had risen nearly 20 per cent nationally since the rate-reduction cycle started in late 2011.

Property analyst Tim Lawless from CoreLogic RP Data said the rate cut, if passed on, would take the typical standard variable mortgage rate down to 5.7 per cent, and the more usual discounted rates to 4.85 per cent on average.

Lower mortgage rates have the potential to add some fuel to what are already strong housing markets. Tim Lawless, CoreLogic RP Data

Bank of Queensland has already announced it will pass on the rate cut in full, taking its standing variable rate down to 5.76 per cent and the discount rate to 4.62 per cent, but not until February 24.

ME Bank will also pass on the cut in full from February 20, but the major banks so far have said only that their rates are under review in light of the decision.

Rate comparison website Finder said a 25-basis-point reduction would save borrowers around $47 per month on an average $300,000 home loan.

Mr Lawless said the average level of home loan rates would now fall to its lowest since 1968.

"Lower mortgage rates have the potential to add some fuel to what are already strong housing markets," he cautioned.

"However, the stimulus from lower rates may not be as influential on housing market conditions as what we have seen in the past.

Bank responses ANZ : 0.25% cut to variable home loans to 5.63% SVR from Feb 12

: 0.25% cut to variable home loans to 5.63% SVR from Feb 12 CBA : 0.25% cut to variable home loans to 5.65% SVR; 0.3% cut to 5-year fixed to 4.69% from Feb 20

: 0.25% cut to variable home loans to 5.65% SVR; 0.3% cut to 5-year fixed to 4.69% from Feb 20 NAB : 0.25% cut to variable home loans to 5.63% SVR from Feb 20

: 0.25% cut to variable home loans to 5.63% SVR from Feb 20 Westpac : 0.28% cut to variable home loans to 5.7% SVR from Feb 20

: 0.28% cut to variable home loans to 5.7% SVR from Feb 20 BoQ : 0.25% cut on variable home loans to 5.76% SVR from Feb 24

: 0.25% cut on variable home loans to 5.76% SVR from Feb 24 ME Bank : 0.25% cut on variable home loans to 5.13% SVR from Feb 20

: 0.25% cut on variable home loans to 5.13% SVR from Feb 20 ING Direct: 0.25% cut on variable home loans to 4.97% SVR from Feb 20

"Lower consumer confidence, stricter serviceability requirements for borrowers, tighter lending conditions for investors, affordability challenges and low rental yields are all factors that may contribute to the moderation in housing market conditions over 2015."

That would certainly be what the Reserve Bank would be hoping, with Mr Stevens again noting a steep rise in Sydney housing prices and a strong rise in lending to investors.

"The bank is working with other regulators to assess and contain economic risks that may arise from the housing market," he said in his post-meeting statement.

While the bank was clearly concerned about rising home prices, it was sanguine about consumer prices.

The RBA expected inflation to remain comfortably within its 2-3 per cent target range over the next couple of years, which gave it the scope to lower rates.

"The CPI recorded the lowest increase for several years in 2014," Mr Stevens observed.

"This was affected by the sharp decline in oil prices at the end of the year and the removal of the price on carbon."

Topics: money-and-monetary-policy, economic-trends, housing-industry, australia

First posted