The Reserve Bank of Australia (RBA) has cut the official cash rate in its May Board meeting today, following weaker than expected inflation data.
The Board thought it was prudent to cut the official cash rate 50 basis points to 3.75 per cent, after headline inflation turned out to be significantly lower than the RBA’s target range of 2 to 3 per cent.
The rate cut failed to shock industry analysts, with many forecasting a rate cut last week.
RP Data's Cameron Kusher told The Adviser that the RBA's decision was the "right" one, as the economy was in serious need of a "boost".
“We have seen a lot of softness in the economy of late. House prices are down on where they were, retail activity has slumped and headline inflation was just 1.6 per cent for the year,” he said.
“There is no doubt the economy is doing it tough at the moment and hopefully this rate cut will help ignite consumer spending once again.”
1300HomeLoan Managing Director John Kolenda said the 50 basis point cut was the minimum required to boost consumer and business confidence, especially as the banks were unlikely to pass on the whole cut.
“The RBA’s decision to swallow its pride today and cut the cash rate by 50 basis points will finally make people sit up and take notice that the central bank is serious about the non-mining sectors of the economy,” Mr Kolenda said.
“This is a good start but the RBA will likely need to cut rates again by 25 basis points over the coming months to really deliver the economic shock treatment the economy has been crying out for.”
Mr Kolenda said that the 50 basis point cut would deliver meaningful relief to borrowers even if banks only passed on part of the reduction due to increases in their cost of funds.
“When even former Reserve Bank governor Bernie Fraser was calling for a 50 basis point cut you know that some action was needed to get things moving again in the economy,” Mr Kolenda said.
Minutes from the meeting today show the RBA took inflation results onboard was making the rate cut decision.
"Recent data for inflation show that after a pick up in the first half of last year, underlying inflation has declined again, and was a little over two per cent over the latest four quarters."
"In considering the appropriate size of adjustment to the cash rate at today's meeting, the Board judged it desirable that financial conditions now be easier than those which had prevailed in December. A reduction of 50 basis points in the cash rate was, in this instance, therefore judged to be necessary in order to deliver the appropriate level of borrowing rates."
With the RBA slashing rates, all eyes will now be on Australia’s lenders to see if they pass on the full rate cut to borrowers.