The full ONE per cent

The Reserve Bank board certainly knows how to surprise! Today’s full one per cent cut to official cash rates was the biggest in 16 years, and double market expectations. In his accompanying statement, RBA governor Glenn Stevens said:

“The recent deterioration in prospects for global growth, together with much more difficult market conditions even for creditworthy borrowers, now present the risk that demand and output could be significantly weaker than earlier expected. Should that occur, inflation would most likely fall faster than earlier forecast.''

Stevens confirmed continuing dramas in the overseas money markets had forced the RBA’s hand, with large-scale financial failures in several countries (most notably the United States) causing dislocation in interbank markets and instability in other markets, including sharp falls in share prices.

Once it got over its initial shock, the local sharemarket jumped 3% on the news. It had earlier followed Wall Street and European markets in a dive, but the S&P/ASX200 closed almost 2% higher – the first rise in four days.

“We want to make sure that those who are currently borrowers get relief and at the same time maintaining the stability of the Australian banking system,” said Kevin Rudd on hearing the news from the RBA. That looks set to happen, as all four of the major banks quickly announced they would pass on 0.8% of the rate cut to mortgage customers, cutting around $100 a month off a $200,000 loan. It means Australians with home loans will still get a big benefit, while banks retain some breathing space, given the higher cost of borrowing money on international markets at the moment. The stability of Australia’s banks has been credited with saving us from the situation currently playing out in the U.S. – and nobody here is particularly keen to go down that path!

So what do you think? Are you excited about an impending cut? Or do you fear it signals the end of the asphalt, and the beginning of the dirt road of recession? And is anybody looking to buy at the moment? Or are you planning to wait and see if Mr Stevens and his boardmates will go further?