Borrowers are set to benefit from a second interest rate cut by the central bank in as many months and there could be more to come, economists say.
The Reserve Bank of Australia (RBA) on Tuesday decided to cut the cash rate to 4.25 per cent from 4.5 per cent at its December board meeting.
It was the second consecutive month that the RBA cut the cash rate, with the central bank citing the likelihood of slowing global economic growth as the reasons for its latest move.
UBS interest rate strategist Matthew Johnson said the futures market was now pricing in 1.25 percentage points of interest rate cuts by mid next year.
That would bring the RBA’s cash rate to three per cent, a level last seen in 2009 during the height of the global financial crisis.
“It does seem extreme, but the futures market is a better predictor than most people,” Mr Johnson said.
“All the experts said it would be up higher a little while ago (a few months ago), and the market ignored them.”
Economists were evenly divided on what the central bank would do at Tuesday’s meeting, but most said there would either be a cut in December or early next year, or both.
If banks pass on the cut in full, homeowners with an average-size mortgage of $300,000 should expect to pay around $49 a month less on their loan repayments.
RBA governor Glenn Stevens said eurozone financial and banking problems were likely to weigh on economic activity over the period ahead.
“Financial markets have experienced considerable turbulence, and financing conditions have become much more difficult, especially in Europe,” Mr Stevens said in a statement accompanying the rates decision on Tuesday.
“This, together with precautionary behaviour by firms and households, means that the likelihood of a further material slowing in global growth has increased.”
ICAP senior economist Adam Carr said the RBA’s decision to cut was due to the economic challenges coming out of the eurozone.
“Realistically, they’re taking out a bit of insurance to head off any negative events from Europe,” he said.
“They note considerable turbulence in financial markets – even in Australia, they note that financial conditions have tightened.”
Mr Carr said the rate cut was not a negative reflection on the Australian economy’s performance.
“Just on the domestic state of play they probably wouldn’t have cut,” he said.
The Australian dollar fell over half a US cents after the RBA interest rate decision.
Commonwealth bank currency strategist Joseph Capurso said the Australian dollar fell after the rate cut because of the RBA’s negative reading of global economic conditions.
He said it seemed the RBA was concerned about the spread of instability in the eurozone into Asian markets.
The next RBA board meeting is scheduled for February 7.
