06/08/2013 - 12:31

RBA slashes rates to new record low

06/08/2013 - 12:31

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The Reserve Bank of Australia has moved as expected, cutting the official cash rate to a new record-low 2.5 per cent.

RBA governor Glenn Stevens said the board judged a further decline in the cash rate was appropriate.

"The board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time," he said.

Mr Stevens said the pace of borrowing in Australia remained subdued, despite the easing of monetary policy over the past 18 months.

He said he expected economic growth to remain below-trend in the near term, as the economy adjusted to lower levels of mining investment.

Inflation has been consistent with the RBA's medium-term target, Mr Stevens said.

"With growth in labour costs moderating, this is expected to remain the case over the next one to two years, even with the effects of the recent depreciation of the exchange rate," he said.

National Australia Bank was the first of the majors to move, cutting its standard variable home loan rate to 5.88 per cent per annum.

NAB's new rate will be effective from August 12.

Commonwealth Bank of Australia also cut its rate by the full 25 basis points, while Westpac trumped them both, with a reduction of 28 points.

St George Bank also passed on the full 25 point cut.

ANZ will announce its intentions in two weeks.

The rate cut, according to RP Data national research director Tim Lawless, would likely provide further motivation for buyers to become active, but rising values would make it difficult for prospective owners.

"This affordability challenge is likely to be most felt by the first home buyer segment and it may be the factor that continues to prevent prospective first home buyers from entering the housing market," Mr Lawless said.

"For investors, with the average discounted variable mortgage rate now approaching the 5 per cent mark they are likely to find more and more properties are approaching a cash-flow neutral or cash-flow positive yield.

"Anecdotally, more and more investors seem to be focusing on rental yield and positioning for long-term capital growth."

Loan Market director Mark De Martino welcomed the 25 basis point cut, saying it would likely be matched by most major banks.

"Cost of funding pressures have significantly eased from last year and lenders are going to leverage this rate drop as an opportunity to attract more customers with competitive interest rates and heavy discounting," Mr De Martino said.

The Housing Industry Association said the rate cut was timely, and urged the banks to pass it on in full.

"On most occasions in recent years, banks have pocketed part of the interest rate cuts rather than allowing their customers to receive the full benefit," HIA senior economist Shane Garrett said.

"The RBA has reduced rates by 225 basis points since November 2011 and it is important to stress the benefits that have resulted.

"Lower interest rates have helped to support a modest though hesitant recovery in residential construction activity.

"There have also been significant cash savings for borrowers with variable rate loans."

Mr Garret said, however, that interest rates were only part of the housing equation, saying weakness in the market was being compounded by the tax burden on new home building, as well as impediments on releasing suitable residential land.

"We look forward to these issues being addressed during the election campaign," he said.

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