The Reserve Bank of Australia has paved the way for interest rate relief for home owners by slashing the cash rate to its lowest level in two years.
The central bank cut the cash rate by 50 basis points to 3.75 per cent at its May board meeting on Tuesday.
The size of the cut caught economists by surprise and caused the Australian dollar to drop by almost a US cent.
It also increased speculation that more cuts could be on the way.
If commercial banks pass on the rate cut in full it will mean repayments on a $300,000 mortgage will drop by just over $96 a month.
Australia’s big four banks, the Commonwealth, ANZ, Westpac and National Australia Bank have yet to say whether they will pass on the full rate cut.
However, Commonwealth Bank chief economist Michael Blythe said the decision to cut by 50 basis points, compared to the usual 25 point cut, meant mortgage holders would receive some relief, even if lenders failed to pass on the full cut.
“It looks a little bit like they are getting it all over in one hit and guaranteeing that, whatever banks may do, you still get a net easing in conditions.”
AMP chief economist Dr Shane Oliver believed banks would lower their standard variable rates by about 35 basis points.
However, he said the RBA was likely to cut again in the coming months.
“It would look for another two 25 basis points cuts, with one around June/July and another around August or September,” he said.
The last time the cash rate stood below 4.0 per cent was in February 2010.
In a statement accompanying the decision, RBA governor Glenn Stevens said a lower inflation outlook provided scope to cut the cash rate and help stimulate the economy.
“This decision is based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected, while inflation has moderated,” Mr Stevens said.
Data released by the Australian Bureau of Statistics last week showed underlying inflation had fallen to 2.15 per cent, near the bottom of the RBA’s target two to three per cent range.
While the 50-point cut surprised economists, it was in line with calls from industry groups who insist lower rates are necessary to stimulate struggling sections of the economy.
Macquarie chief economist Richard Gibbs said the rate cut was the right move for the economy.
“It signals a decisive shift in their (the RBA’s) thinking in relation to their outlook on growth in the economy,” he said.
