RBA surprises market with 1 per cent drop in cash rate

Posted by James Ferre on 7th October 2008

The Reserve Bank of Australia has delivered some welcome news to businesses beginning to struggle as economic fears grip the world by reducing the official cash rate by 1% to 6.0%. The 100 basis point cut announced this afternoon was double the 50 basis point reduction anticipated by most economists.

It remains unclear the true impact of the cut on borrowers, as banks battle to raise funds in overseas money markets.

The shock decision was due to financial markets taking a “significant turn for the worse”, according to the RBA. The central bank believes that inflation is now under control and slowing growth could cause concern in coming months.

“Thus far, the overall path of economic activity in Australia appears to have been close to what the Board had expected, with the needed moderation in demand occurring,” Glenn Stevens, Governer of the RBA, advised in a statement. “The next CPI is likely to show an increase of around 5 per cent over the four quarters to September, but the Bank remains of the view that inflation will start to decline in 2009.”

Australian Retailers Association Executive Director Richard Evans said that the second cut in two months is great news for consumers and the effects should flow through the economy immediately with consumer sentiment to turn in time for the 2008 Christmas season. “Regardless of whether banks pass on this interest rate cut, the RBA’s decision today is a very strong sign that our leading financial regulators believe the underlying foundations of the Australian economy is strong,” he said. “Despite unstable global economic conditions, Australia is weathering the storm from overseas. This will help turn consumer confidence around and start the upwards trend for consumer spending after successive months of stagnant and declining growth. This is great news for consumers and even better news for retailers hard hit by months of reduced consumer demand.”

“It is time for the narrative from government and media to change as the Australian economy receives a boost. The damage caused by decreases in retail sales and turnover will require positive narrative from Canberra and a government focus on economic conditions. Retail is the barometer of the economy and with consumer sentiment at its lowest since 1992 we hope today’s decision changes conditions,” Mr Evans concluded.

“The economy is at a tipping point,” Australian National Retailers Association Chief Executive, Margy Osmond, added. “With Christmas just around the corner, the retail sector has been looking for a revival in consumer confidence. If the banks support the one per cent cut to the cash rate, the Reserve Bank’s decision should help restore confidence.”
The 1% cut was the largest since May 6 1992.