The Reserve Bank has cut official interest rates by 25 basis points to a fresh record low of 2 per cent.
After cutting rates by 25 basis points in February, the bank had kept the cash rate target steady for the past couple of months, despite economist expectations of another cut.
Once again, 25 out of 29 market economists told Bloomberg ahead of the meeting that they expected the Reserve Bank to cut, and this time they were not disappointed.
If passed on in full, the move would save a borrower with a $300,000 mortgage around $47 per month in repayments.
ANZ was the first major bank to pass on the rate cut, lowering its standard variable mortgage rate by 25 basis points to 5.38 per cent, effective this Friday.
Interest rate monitoring firm RateCity said the lowest-rate discount variable home loans should now drop below 4 per cent for the first time on record.
While the Australian dollar initially dipped as low as 77.8 US cents very briefly on the decision, the currency has since bounced back above where it was prior to the 2:30pm (AEST) announcement.
By 2:36pm the Australian dollar was almost half a cent higher at just under 79 US cents.
Ahead of today's meeting analysts expected the Reserve Bank to make this cut and then sit on the sidelines, with the majority of experts tipping the next rate move will be up, but probably not until 2016.
--- We know the hurdle to cut further is high. It won't happen until much later in the year. RBC senior economist Su-Lin Ong ---
RBA governor Glenn Stevens' statement does nothing to disabuse analysts of this view, dropping the previous month's reference to further rate cuts in the key final sentence.
"At today's meeting, the board judged that the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand," he said.
What was left out was last month's statement that, "further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target", its omission implying that the bank may now be satisfied with its work and moving to a neutral bias.
RBC Capital markets senior economist Su-Lin Ong said the absence of that statement is a firm indication that there will not be more rate cuts over the next few months.
"There is a good chance the cash rate goes below 2 per cent, but we know the hurdle to cut further is high. It won't happen until much later in the year," she told Reuters.
'Growing housing market risks'; Fitch calls for more regulation
A key risk with the current, and any future, rate cut is that it will further boost Australian real estate prices at a time when they are already booming in the biggest market of Sydney and rising strongly in Melbourne.
The Reserve Bank said it is working with other regulators to "assess and contain risks that may arise from the housing market", referring to moves announced late last year to tighten lending standards, particularly for investors.
However, ratings agency Fitch warns that further action is likely to be needed in light of the boost the latest rate cut will provide.
"Growing risks in the housing market and the banks' mortgage portfolios could be exacerbated if further macroprudential scrutiny is not forthcoming," Fitch noted.
"The recent interest rate cut may lead to further house price appreciation, especially in cities such as Sydney and Melbourne, where there has been greater investor activity over the past 12 to 18 months.
"The first rate cut in February 2015 was followed by increased activity in these housing markets."
Fitch suggests that tighter debt-servicing tests for new loans and additional capital requirements for banks would help mitigate risks to the financial system in the event of a housing downturn.
Many economists, including Janet Yellen, view global economic troubles since 2008 largely as a story about “deleveraging” — a simultaneous attempt by debtors almost everywhere to reduce their liabilities. Why is deleveraging a problem? Because my spending is your income, and your spending is my income, so if everyone slashes spending at the same time, incomes go down around the world.
[...]
You can see that misunderstanding at work every time someone rails against deficits with slogans like “Stop stealing from our kids.” It sounds right, if you don’t think about it: Families who run up debts make themselves poorer, so isn’t that true when we look at overall national debt?
No, it isn’t. An indebted family owes money to other people; the world economy as a whole owes money to itself. And while it’s true that countries can borrow from other countries, America has actually been borrowing less from abroad since 2008 than it did before, and Europe is a net lender to the rest of the world.
Because debt is money we owe to ourselves, it does not directly make the economy poorer (and paying it off doesn’t make us richer). True, debt can pose a threat to financial stability — but the situation is not improved if efforts to reduce debt end up pushing the economy into deflation and depression.
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