The Reserve Bank has now lowered its key cash rate by altogether 175 basis points since it embarked on the current cutting cycle in November 2011. Reserve Bank governor Glenn Stevens said in a statement that while the full effects of earlier cuts were yet to be observed, ‘‘the board judged at today's meeting that a further easing in the stance of monetary policy was appropriate now’’. ‘‘This will help to foster sustainable growth in demand and inflation outcomes consistent with the target over time.’’ Australia's rates are still some of the highest in the world despite the cut. Countries such as the United States and Britain, where rates are near zero, have resorted to other steps to stimulate their economies such as buying large amounts of government debt.

Waiting for the big banks

All eyes will now turn to the big banks and whether they pass on the rate cut in full. The chief executive of the Australian Bankers’ Association (ABA), Steven Munchenberg, signalled this morning that higher funding costs meant banks would not always pass on cuts in full. ‘‘Banks are facing higher funding costs mainly due to the competitive rates being paid on deposits. Prior to the GFC, term deposits were priced on average 200 basis points below the cash rate. Now, they are 20 basis points above the cash rate,’’ he said. ‘‘While interest rates on deposits remain attractive and competitive for savers, when combined with the cost of wholesale funding, deposits continue to put pressure on the overall cost of funds for banks.’’ (The cut is an) early Christmas present that hardworking Aussies deserve. Wayne Swan

The first bank to announce a cut to its mortgage rates, just minutes after the RBA decision, was Bank of Queensland, but the lender held onto 5 basis points, reducing its standard variable mortgage rate by just 20 basis points to 6.51 per cent. Chief executive Stuart Grimshaw said BoQ was conscious of the pressures facing all customers at this time of year, including those with home loans and those with deposits, and believed the 20 basis points cut "would strike a fair balance between the two". Online lender ING Direct passed on the full RBA cut and reduced its variable mortgage rates by 25 basis points, with the change coming into effect on December 24. ‘‘Our funding position has eased recently allowing us to pass on 25 basis points, however, the threat of elevated funding costs has not passed completely,’’ chief financial officer Glenn Baker said. Risks on the downside



Mr Stevens said global growth was forecast to be slightly lower for some time, with risks to the outlook still seen to be on the downside due to the crisis in Europe and continuing fiscal cliff discussions in Europe. ‘‘Recent data suggest that the US economy is recording moderate growth and that growth in China has stabilised. Around Asia generally, growth has been dampened by the more moderate Chinese expansion and the weakness in Europe,’’ he said. The dollar rose more than a quarter of a US cent to as high as $US1.0455 in the minutes after the decision. The rate cut was mostly expected by economists, who cited the softening mining sector and the continued moderating of the Australian economy as reasons why the Reserve Bank would move to lower rates. ANZ currency strategist Andrew Salter said the dollar surged following expectations in the market that the RBA would have issued a more "dovish statement" and that interest rates would have been eased by 50 basis points instead.

Mr Salter said he believed the market had misinterpreted some of the RBA comments as reflecting that it was coming to the end of its easing cycle. "There’s been some decision that’s the case and there were a couple of lines in the statement that alluded to the RBA having put in place a large amount of stimulus in its easing cycle," he said. "And that is obviously prima facie correct, and some in the market have extrapolated that to mean, incorrectly I think, that they’re looking towards ending their easing cycle." He said that while ANZ did not forecast further cuts from the RBA, they expected an easing bias in the forecast horizon. 'Good news for families' While interest rates are at the same level as they were during the financial crisis, federal Treasurer Wayne Swan said in a press conference after the RBA annnouncement that Australia's economic conditions were vastly different.

Mr Swan added that during the financial crisis, global growth was at -0.6 per cent, while the Aussie was about 60 cents. Citing Mr Stevens’ statement, he emphasised that the conditions in the economy this year were running close to trend. Mr Stevens said that indicators suggested that growth was running close to trend over the past year, ‘‘led by very large increases in capital spending in the resources sector, while some other sectors have experienced weaker conditions’’. ‘‘Looking ahead, recent data confirm that the peak in resource investment is approaching. As it does, there will be more scope for some other areas of demand to strengthen,’’ the statement continued. Recent data also showed company profits falling 2.9 per cent in the third quarter, a drop of 0.2 per cent in wage and salary payments in the September quarter, a 2.9 per cent reduction in job advertisements in November, flat retail spending in October and flat house prices in November. Mr Swan said the cut was an "early Christmas present that hardworking Aussies deserve". "When you have an interest rate cut, that's good news for families and good news for business," he said.

However, Mr Swan said he would not be surprised to see official data showing economic growth moderated in the third quarter after above trend growth in the first half of the year. Official national accounts data for the third quarter are due tomorrow. "We've had above trend growth in our economy for the first half of the year. Now we have the national accounts out tomorrow. I wouldn't be surprised if we saw a slight moderation in growth." Not a cheer for everyone The Christmas cheer that may come with a rate cut will not extend to pensioners, self-funded retirees and other older Australians living off their investments, the National Seniors lobby group said. Michael O’Neill, the National Seniors chief executive, said more than one million people fall into this category and could be losing an amount equivalent to 25 per cent of a person’s wages.

‘‘Some pensioners might have $5000, $10,000 or $15,000 put aside in term deposits, so they are impacted through to those would might have substantially more than that and are totally reliant on it,’’ he said. ‘‘So over the past 18 months, we’ve seen a reduction of about 1.75 per cent from about 6 per cent, so it’s over 25 per cent reduction in the interest rate on offer. So for people who are relying on that, it’s almost equivalent to comparing it with people on a wage having a 25 per cent reduction on their wage.’’ More cuts tipped AMP Capital chief economist Shane Oliver said more cuts from the RBA should be expected. "Our assessment remains that the RBA has more work to do," he said. "While the global outlook has improved a bit, the Australian outlook has become more uncertain as evidence continues to build that mining investment, the key driver of Australian economic growth in recent years, is peaking at a time when the rest of the economy is still subdued."

Mr Oliver added that the cash rate would need to fall to 2.5 per cent at the least. "Standard variable mortgage rates will need to fall to around 6 per cent at least, which implies that the official cash rate will need to fall to 2.5 per cent at least," he said. "This is expected to occur during the first six months of next year, with the RBA cutting again in February by another 0.25 per cent." Other analysts doubt the RBA will need to lower rates much further, said CBA senior economist John Peters. Loading

‘‘With rates now well into stimulatory territory (that is, now at the 2009 emergency lows in the immediate wake of the GFC), we think we are nearing, or at the low point, for the current easing cycle," Mr Peters said. Although, further modest policy easing cannot be ruled out in early 2013 if the fourth-quarter consumer price index (due January) is benign and the economy shows further softening in the months ahead.