Dollar tumbles after RBA cuts interest rates to record low

Tuesday, 3 May 2016 12:30:24 | Stephen Letts

Unexpected deflation has fuelled expectations the RBA will make the move. (AAP: Joel Carrett)

The Reserve Bank of Australia has moved to head off fears about deflation, cutting its official cash rate by 25 basis points to a historic low of 1.75 per cent.

Key points:

Cut influenced by core inflation rate of 1.5pc — lowest reading on record
If cut fully passed on, it would mean a $43-a-month saving on a 25-year, $300,000 mortgage
"Potential risks of lower interest rates... are less than they were a year ago," RBA governor says

It is the first change in interest rates since May last year, when rates were cut 25 basis points to 2 per cent.

Before the decision, the market had priced in roughly a 50 per cent chance of a cut after last week's surprisingly weak inflation figures.

Key to the decision was the reading of core inflation — the RBA's preferred measure — at 1.5 per cent, the lowest reading on record and well below the target band of 2 to 3 per cent.

If the 25 basis point cut was fully passed on to home loans by the banks, it would equate to a $43-a-month saving on a typical 25-year $300,000 mortgage.

Dollar tumbles on decision

The Australian dollar immediately tumbled 1 per cent to below 76 cents against the US dollar in response to the cut.

In a statement accompanying the decision, RBA governor Glenn Stevens pointed to the unexpectedly weak inflation data as the reason behind the move.

"While the quarterly data contain some temporary factors, these results, together with ongoing, very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast," Mr Stevens said.

Mr Stevens said the board took into account developments in the housing market and the impact a tougher regulatory stance was having on keeping a lid on prices.

"At present, the potential risks of lower interest rates in this area are less than they were a year ago," he said.

Graph showing a tumble for the Australian dollar after news of an RBA cut.

Infographic: Australian dollar tumbles on news of RBA cut. (Supplied)

The RBA also noted that while the global economy continued to grow, the growth was at a slower pace than expected and forecasts had been revised down further.

"Sentiment in financial markets has improved, after a period of heightened volatility early in the year," Mr Stevens said.

"However, uncertainty about the global economic outlook and policy settings among the major jurisdictions continues.

"Funding costs for high-quality borrowers remain very low and, globally, monetary policy remains remarkably accommodative.

"Taking all these considerations into account, the board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting."

NAB immediately passes on full cut

The move had an immediate impact on commercial banks, with NAB passing on the full 25-basis-point cut, taking its standard variable home loan from 5.60 per cent to 5.35 per cent.

Investment loans will drop from 5.75 per cent to 5.50 per cent, while business loans will also be cut by 25 basis points.

NAB personal banking group executive Gavin Slater said in making the decision to change interest rates, the bank considered a range of factors.

"The circumstances of each decision will always vary, and we must take into account factors such as competition, regulatory capital requirements, and funding costs," Mr Slater said.

Likely to be followed with another cut: ANZ

Capital Economics economist Paul Dales said the RBA's move will help solve the economy's twin problems of too slow growth and too low underlying inflation.

"The RBA cut rates not just because underlying inflation has been low, but because the weaker economic outlook and stronger dollar means that it will remain low this year and next," Mr Dales said.

ANZ's Felicity Emmett said the cut rates will keep a lid on further appreciation in the Australian dollar, and increases the likelihood that we have seen its peak, although it is not necessarily a trigger to take it down to 70 US cents.

"This is unlikely to be a 'one-and-done' cut," Ms Emmett said.

"The RBA nearly always follows up with another cut and we expect this time to be no different."

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