Reserve Bank cuts rates

The Reserve Bank has slashed interest rates by the most since the global financial crisis in a bid to reignite growth in the sagging economy.

The central bank today cut its official cash rate by 50 basis points - twice the amount expected by economists - to 3.75 per cent.

Today’s reduction, the first by the RBA this year, is the biggest since February 2009 and reflects the bank’s concern that the economy needs an extra shot in the arm.

Attention will now shift to the commercial banks as borrowers - and depositors - wait to see how much the lenders cut interest rates, and how soon.

The RBA’s surprise move will come as a mixed blessing for Treasurer Wayne Swan as he puts the final touches to next week’s federal budget.

While Mr Swan will welcome the cut and the potential for easing the financial squeeze for households with mortgages, the size of the reduction implies the economy is weaker than the central bank had predicted - which in turn means a smaller tax take for the government.

If passed on in full by the banks, a 50 basis-point cut will save about $96 a month for mortgage holders on a typical 25-year, $300,000 home loan.

Today’s cut leaves the RBA’s cash rate at its lowest since December 2009 when the economy was recovering from the initial impact of the GFC. The RBA raised rates seven times from October 2009 before changing course last November with the first of two cuts to round out 2011.

The central bank last month signalled that it was poised to cut interest rates at its May meeting provided first quarter inflation figures were benign. In fact, by the RBA’s own core inflation measure, prices in the March quarter rose 2.15 per cent, the slowest annual pace since the final three months of 2000.

The RBA received the latest proof of a slowing economy today, with manufacturing slumping to its weakest in seven months while two surveys of home prices pointed to a broadbased retreat in most capital city markets.

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