The Reserve Bank of Australia has cut interest rates by 25 basis points to 3.5%, citing “modest” growth in Australia and “weakening” conditions internationally.
The June monetary policy meeting follows the decision last month to cut 50 basis points from the cash rate.
The move to further reduce rates is likely to be welcomed by businesses struggling with flagging consumer confidence, should the commercial banks pass on the cut.
In a statement, RBA governor Glenn Stevens said that market sentiment has “deteriorated” over the past month, but that there was a small pick-up in business credit.
“As a result of earlier changes to monetary policy, interest rates for borrowers have declined to be a little below their medium-term averages,” he said.
“Business credit has increased more strongly in recent months, though credit growth remains modest overall. Housing prices had shown some signs of stabilising around the turn of the year, but have recently declined again.”
“Generally, the housing market remains subdued. The exchange rate has declined over recent weeks, reflecting lower commodity prices, heightened risk aversion and expectations of lower interest rates.”
“In Australia, available indicators suggest modest growth continued in the first part of 2012, with significant variation across sectors.”
“Overall labour market conditions firmed a little, notwithstanding job shedding in some industries, and the rate of unemployment remains low. Nonetheless, both households and businesses continue to exhibit a degree of precautionary behaviour, which may continue in the near term.”
“At today’s meeting, the Board judged that, with modest domestic growth and a weaker and more uncertain international environment, the outlook for inflation afforded scope for a more accommodative stance of monetary policy.”
Paul Smith, corporate spokesman at mortgage firm Loan Market, says: “The continuing concerns about Europe and even domestic political considerations could be having an impact on consumer confidence overall.”
“But this latest reduction by the RBA will be warmly received by borrowers and the struggling retail sector, and the cash rate is again down to near record lows after being reduced to 3% in April 2009.”
Mark Courtney, research director of Colliers International, says while the move is a positive one, further cuts are still needed.
“The banks are likely to only pass on part of the 0.25% drop in the official rate – if they pass on any at all,” he says.
“Consequently, today’s RBA decision is likely to have only a minimal impact… For a greater impact, additional cuts are still needed.”
“Ideally, the RBA will be looking to reduce the official cash rate by another 25 to 50 basis points over the next few months.”
According to the Australian Retailers Association, retailers will be overjoyed by the RBA’s decision.
“For the past few months, retailers have been the catchment point for the big banks’ failure to pass on rate cuts and, in many cases, their decisions to raise them,” ARA executive director Russell Zimmerman says.
“Retailers are today calling on banks to read the neon signs flashing before them to pass on the rate cut in full.”
Craig Godber, senior associate director at CBRE Global Research and Consulting, points out the RBA has cut interest rates by 75 basis points over the last two months.
“This reflects a deterioration in the global outlook, with signs the US recovery has stalled, China’s growth is slowing and the Eurozone’s prolonged crisis has not been resolved,” he says.
At its meeting today, the Board decided to lower the cash rate by 25 basis points to 3.5%, effective June 6, 2012.