Financial markets rallied today after the central bank slashed official interest rates in a bid to keep the Australian economy ticking along amid the turmoil sweeping the US, Europe and Asia.
In its biggest move in 16 years, the Reserve Bank of Australia (RBA) stripped a full one per cent off the cash rate, leaving it at six per cent and its lowest level in almost two years.
The federal government and financial markets reacted warmly.
Prime Minister Kevin Rudd said the “decisive” move would help Australia through the tough times as the global economy slowed.
The cut also sends a message that the RBA will do all it can to ease the burden faced by borrowers, unplug battered lending markets and keep the economy strong.
“The government welcomes the relief the Reserve Bank of Australia’s decision will provide to working families and Australian small businesses,” Rudd said.
The big commercial banks have begun passing on most of the RBA cut to mortgage holders.
Westpac led the charge with a 80 basis point cut to its standard variable rates, and was followed by Commonwealth Bank, National Australia Bank and ANZ.
The stock market, which had been trading in the red ahead of the RBA announcement at 1430 AEDT, shot higher to end the day up more one per cent and $13 billion better off.
The Australian dollar had fallen to a four-year low of 68.85 US cents overnight and but lifted above 72.50 US cents as currency traders applauded the RBA’s show of strength.
Economists described the cut as “courageous” and “stunning” – none had thought 100 basis points was possible and were focused on a 50 point cut.
“This is a bold and extraordinary move, catching financial markets by surprise,” AMP Capital investors senior economist Bob Cunneen said.
Opinion is divided on whether the central bank will cut again this year, but the majority of economists believe rates will fall further.
“We are heading towards five per cent, maybe lower over the next six to 12 months,” RBC Capital Markets senior economist Su-Lin Ong said.
The RBA did signal that the 100 basis point reduction – its biggest since May 6, 1992, when it lowered the cash rate to 6.50 per cent – was unlikely to be repeated soon.
“The board does not, however, regard that move as establishing a pattern for future decisions,” governor Glenn Stevens said.
This implies the RBA might have used up most of its interest rate firepower for now.
But it’s still given local markets reason for optimism.
“These are desperate times, requiring desperate measures, and the Reserve Bank hasn’t been afraid to act,” CommSec chief equities economist Craig James said.