RBA shock: rates cut by 1% RBA shock: rates cut by 1%
07/10/2008

The Reserve Bank slashes its benchmark interest rate by 100 basis points to 6 per cent.

The Reserve Bank has stunned financial markets by announcing a full-percentage point cut - double what analysts had tipped - saying financial markets had taken a "significant turn for the worse.''

Australia's official lending rate was lowered for a second consecutive month, although it is unclear how much of the 100 basis-point cut will be passed on to mortgage-holders and other borrowers as banks struggle to raise funds in overseas money markets.

The Reserve Bank cut its key cash rate from 7% to 6%, double the 50 basis-point cut expected by markets. The move follows a 25 basis-point cut by the RBA in September, lowering the lending rate from a 12-year high.

The RBA said the Australian economy now faced the prospect of slowing growth, while inflation would also subside.

''The recent deterioration in prospects for global growth, together with much more difficult market conditions even for creditworthy borrowers, now present the risk that demand and output could be significantly weaker than earlier expected,'' Reserve Bank governor Glenn Stevens said in an accompanying statement. ''Should that occur, inflation would most likely fall faster than earlier forecast.''

"Overall, my guess remains that the RBA's cash rate is on the way from 7% to 6% to 5% and towards 4%," said Rory Robertson, Macquarie interest-rate strategist, before the RBA announcement. "The RBA seems likely to cut its cash rate all the way back to 4.25% within two years.''

One reason for the steep cuts to come is that clogged credit markets overseas mean that only some of the RBA's rate reductions are likely to be passed on by commercial banks, Mr Robertson said.

Commercial banks announced cuts to their variable home loan rates within minutes of last month's RBA rate move, but the signals this month have suggested consumers and business borrowers are likely to receive only part of today's rate and possibly not for some days.

Prime Minister Kevin Rudd and Treasurer Wayne Swan have both sought to head off some of the criticism of the banks from any delayed rate cuts on their part, saying it is important the country's banks remain as strong as possible during a period of extreme market turmoil that has already claimed some of the largest US and European banks.

Opposition Leader Malcolm Turnbull, however, says that the banks remain highly profitable in a market of shrinking competition and can afford to follow the RBA's rate cuts.

Just prior to today's RBA decision, the benchmark S&P/ASX200 share index was down about 0.5% at 4519 points, clawing back a drop of as much as 3.3% earlier in the day. Overnight, European and US markets plunged on worries that the global economy with wither.

The initial response was for stocks to jump about 2%, to trade 1.4% higher for the day.

The Australian dollar, which has plunged more than 10 US cents in the past couple of trading days, was recently at 70.37 US cents, down from 71.97 just prior to the RBA's shock move.

Source: Sydney Morning Herald