The Reserve Bank has delivered an early Christmas present and cut interest rates today by 0.25 per cent.
The official interest rate is now 3% which is as low as it fell during the Global Financial Crisis in 2008-09.
The cut comes after a recent batch of negative data about the domestic economy. The 25 basis point drop is the sixth Reserve Bank cut since November last year and will be a relief to home owners and business operators.
It is also expected to be a boost to retailers, the tourism industry, the property market and the car industry all of whom rely on an upswing in sales in the December and January period. Retailers and tourism may be expected to feel the effect almost immediately if consumers react positively while property and car sales can expect renewed interest in the New Year as the rate cut takes effect.
Rates have now dropped 1.75% since the current cycle of easing began on Melbourne Cup day in 2011. Each time 0.25% is sliced off itnerest rates, about $60 comes off the monthly interest cost of an average Australian mortgage.
While the cut may be good news domestically, the reason for it is not so good. Governor of the Reserve Bank, Glenn Stevens, noted that global economic growth is forecast to be below average in the short to medium term.
"Risks to the outlook are still seen to be on the downside, largely as a result of the situation in Europe, and the uncertainty in the US."
Mr Stevens said, however, that the US economy is recording moderate growth and that growth in China has stablised. He also said that Europe is likely to remain a source of instability in world financial markets for some time.
He also said that the underlying inflation rate is sitting around 2.5% and is expected to rise briefly to 3% over the next six months partly due to the introduction of the carbon price and its impact on some prices.
The Reserve Bank Board will not meet again until February.
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