RBA cuts rate by 25 basis points to 3.5%

The Reserve Bank of Australia has answered the prayers of business owners and mortgage holders by cutting official interest rates by 25 basis points from 3.75% to 3.5%, citing worsening conditions in Europe and China.

RBA governor Glenn Stevens painted a grim picture of worsening conditions on financial markets, with the woes of Europe weighing heavily on global credit

“Europe’s economic and financial prospects have again been clouded by weakening growth, heightened political uncertainty and concerns about fiscal sustainability and the strength of some banks.

“Capital markets remain open to corporations and well-rated banks, but spreads have increased. Long-term interest rates faced by highly rated sovereigns, including Australia, have fallen to exceptionally low levels. Share markets have declined.”

Stevens said economic conditions in Australia remain patchy, although the labour market continues to hold up well.

“Nonetheless, both households and businesses continue to exhibit a degree of precautionary behaviour, which may continue in the near term,” Stevens said.

Stevens described the housing market as “subdued” but said business credit had increased more strongly in recent months.

“At today’s meeting, the Board judged that, with modest domestic growth and a weaker and more uncertain international environment, the outlook for inflation afforded scope for a more accommodative stance of monetary policy.”

Some economists had predicted the RBA could cut by as much as 50 basis points, but it would appear the central bank has decided to retain some firepower should the situation in Europe worsen.