The Reserve Bank of Australia has cut the official cash rate by 75 basis points to 5.25 per cent, its lowest level since March 2005.
The Reserve Bank of Australia has cut the official cash rate by 75 basis points to 5.25 per cent, its lowest level since March 2005.
Most analysts had expected the central bank to cut the rate by 50 basis points, which was factored in by the stock market yesterday which soared to close 5 per cent higher.
After the RBA announcement, the major indices had rallied slightly but were still in the red. The All Ordinaries index was down 0.4 per cent or 16.6 points to 4156.4, while the S&P/ASX 200 was down 0.45 per cent or 19.1 points to 4202.4 at 14:37 AEDT.
At noon, both indices were down around 1.6 per cent.
The last time rates were at 5.25 per cent was in March 2005, before the RBA increased rates by 25 basis points to 5.5 per cent. Prior to that rate increase, the rate was left at 5.25 per cent for nearly two years.
The rate cut comes a day after weaker than expected economic data was released, all putting pressure for the bank to cut rates.
Yesterday the ANZ employment survey today showed a decline in newspaper and internet ads for the sixth successive month in October, while retail trade showed the biggest monthly seasonally-adjusted drop in three years during September.
Meanwhile, Australia's manufacturing sector suffered the weakest activity in 16 years in October.
Below is the RBA announcement:
At its meeting today, the Board decided to reduce the cash rate by 75 basis points to 5.25 per cent, effective 5 November 2008.
World financial markets have remained turbulent over the past month. Global equity prices have been volatile and fell further in net terms, and there have been significant exchange rate movements, including a sharp depreciation of the Australian dollar. A number of governments have announced measures to strengthen their financial systems, which should help to stabilise conditions over time.
International economic data have continued to point to significant weakness in the major industrial economies, and there have been further signs that China and other parts of the developing world are slowing as well. These conditions have contributed to further falls in world commodity prices.
In Australia, the overall path of economic activity appears until recently to have been close to what the Board had expected, with a needed moderation in demand occurring after a period of earlier strength. Recent reductions in borrowing rates, the depreciation of the exchange rate and the fiscal stimulus announced in October will work to assist growth in the period ahead, but deteriorating international conditions and falling commodity prices will have a dampening influence. On balance, it appears likely that spending and activity will be weaker than earlier expected.
Consumer price inflation in Australia remained high in the September quarter. As expected, CPI inflation in year‑ended terms picked up to 5 per cent, while underlying measures were just over 4½ per cent. Nonetheless, capacity pressures are now easing and, given the outlook for more moderate growth in demand and activity, it is reasonable to expect that inflation in Australia will soon start to fall. Global disinflationary forces will assist in this regard, though the depreciation of the exchange rate means that the decline of inflation to the target could take longer than would otherwise be the case.
Weighing up these international and domestic developments, the Board judged that a further significant reduction in the cash rate was warranted. The Board will continue to monitor developments and make adjustments as needed to promote sustainable growth consistent with achieving the 2-3 per cent inflation target over time.
