RBA lowers rate by 25bps to 3%

The Reserve Bank of Australia's decision to cut the official cash rate by a quarter of a percentage point to 3 per cent has been hailed as a "very smart" move by economists.

Today the central bank cut the rate to its lowest level since 1960, when the official interest rate was at 2.94 per cent.

In a statement, RBA governor Glenn Stevens said despite major changes in both monetary and fiscal policies in Australia, the board decided there was scope for a further "modest adjustment" to the cash rate.

"The stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead," Mr Stevens said.

The RBA decision comes as the federal government starts delivering its $900 cash handouts to over 7 million Australians.

Mr Stevens also noted the various stimulus packages being rolled out across the world of which the effects were not yet discernible but should help contain the downturn for the rest of the year.

"There are tentative signs of stabilisation in several countries, including China, though it is too early yet to judge how durable these will prove to be," Mr Stevens said.

The RBA noted Australia's contracting economy but reiterated that the rate is slower to that of the country's trading partners.

The bank expects labour costs to fall on the back of weaking demand and projects inflation over the medium-term to be lower than the past two years.

"Demand for credit is weak overall, though credit for owner-occupied housing is picking up," Mr Stevens said.

Today's rate cut comes ahead of March unemployment figures which will be released by the Australian Bureau of Statistics on Thursday.

CommSec chief economist Craig James said today that the RBA rate cut was a "very smart decision" and left the door open for more stimulus if needed.

"The Reserve Bank strategists must have been up all night running through the options, and it looks like they have come up with a winner," Mr James said.

"The $900 cash handout to consumers, the upcoming Budget and forthcoming tax cuts would have been significant factors causing the Reserve Bank to hasten slowly on further rate cuts.

"The fact that rates have been cut by just 25 basis points, not 50 basis points should be very well received.

"A larger reduction in rates may have signalled to some people that the economy was in bad shape and that worse news lay ahead. And if the Reserve Bank had left rates on hold, it wouldn't have achieved the same media coverage and boost to confidence levels."

Treasurer Wayne Swan has called on banks to pass on cuts to consumers.

The Commonwealth Bank of Australia has the first cab off the rank, cutting its standard variable mortgage rate by 10 basis points to 5.64 per cent, effective April 17.

The National Bank has decided ot leave its rates on hold.

The RBA statement is below:

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 3.0 per cent, effective 8 April 2009.

Recent information from abroad indicates that the contraction in the global economy continued during the first few months of this year, and most assessments of the near‑term outlook have been further marked down. Considerable economic policy stimulus is in train in most countries, the full effects of which are not yet discernible, but which should help contain the downturn over the rest of the year. There are tentative signs of stabilisation in several countries, including China, though it is too early yet to judge how durable these will prove to be.

Conditions in global financial markets have continued to improve gradually, helped by progress towards a resolution of banking system difficulties in the United States and other major countries. Sentiment remains fragile, however, and the contraction in economic activity is affecting asset quality of financial institutions.

The Australian economy is contracting, though by less than those of its trading partners. Capacity utilisation has fallen from its peak, and will decline further over the rest of the year. With demand for labour weakening, growth in labour costs will probably also fall. Hence inflation over the medium term is likely to be lower than it has been over the past two years. Demand for credit is weak overall, though credit for owner‑occupied housing is picking up.

There has already been a major change in both monetary and fiscal policy in Australia. Market and mortgage rates are at very low levels by historical standards and business loan rates are below recent averages, reducing debt‑servicing burdens considerably. Nonetheless, the Board judged that there was scope for a further modest adjustment to the cash rate. The stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead.