Reserve Bank
The Reserve Bank's office in Canberra

May 1, 2012

Struggling South Burnett homeowners and retailers received a boost today when the Reserve Bank of Australia unexpectedly cut interest rates by 50 basis points.

The cut is the first since December 2011 – and the biggest since February 2009 – and takes the official cash rate from 4.25 per cent down to 3.75 per cent.

Business groups, unions and retailers had been pushing for a 50 basis point cut to inject life back into the nation’s stagnant housing and retail markets by boosting consumer spending.

However, this morning most thought it unlikely the RBA would move that far and were tipping a 25 basis point cut.

This afternoon, though, many pundits thought it unlikely that all lenders would pass on all the savings – especially the big four banks.

Of the 50 basis point cash rate reduction from the RBA since November 2011, the big four banks have only passed on around 40 basis points to variable rate home loan customers.

Nonetheless, even if the banks only passed on 80 per cent of the latest cut, this would bring some relief to home owners struggling with cost-of-living pressures, reducing monthly repayments on a typical $300,000 mortgage by about $96.

In a statement, RBA governor Glenn Stevens said the decision was based on “information received over the past few months” that suggested that economic conditions were weaker than expected, although he insisted the outlook was not unduly negative.

“Growth in the world economy slowed in the second half of 2011 and is likely to continue at a below-trend pace this year,” he said.

“A deep downturn is not occurring at this stage, however, and in fact some forecasters have recently revised upwards their global growth outlook.”

Mr Stevens said the soaring Australian dollar had hurt output growth and the nation’s housing market “remains subdued”.

“In Australia, output growth was somewhat below trend over the past year, notwithstanding that growth in domestic demand ran at its fastest pace for four years. Output growth was affected in part by temporary factors, but also by the persistently high exchange rate.”

Treasurer Wayne Swan claimed credit for the cut, saying it was made possible by the Federal Government’s fiscal discipline.

“This is the interest rate cut that households and small businesses have been hanging out for,” Mr Swan said.

The National Retail Association also welcomed the cut – which they had lobbied for – saying it would save local businesses and jobs.

“The 50-point cut is exactly what retailers desperately needed in order to put them back on level ground,” NRA executive director Gary Black said.

“However, now that the RBA has done its part, the onus is back on the Federal Government to address the unfair import arrangements applying to online sales, and allow Australian businesses to compete on an even playing field with their foreign rivals.”

Most economists expect further rate cuts to follow today’s decision, with many predicting the RBA would make another cut between June and August if the economy remains sluggish.

The Aussie dollar immediately began dropping after the announcement, quickly trending down toward the $US1.03 mark in afternoon trading.

Some economists now expect it will sink below parity with the US dollar over the next few weeks, bringing some relief to exporters, as well.

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