Businesses hail interest rate cut as an “early Christmas present”

Industry groups have applauded the Reserve Bank’s decision to lower the cash rate to 4.25%, as the European debt crisis continues to impact on the Australian economy.

The decision to cut interest rates for the second consecutive month comes after ratings agency Standard & Poor put 15 eurozone nations on a “negative” ratings outlook.

At today’s RBA board meeting, governor Glenn Stevens said growth in the global economy has moderated this year after a strong performance in 2010.

“The sovereign credit and banking problems in Europe… are likely to weigh on economic activity there over the period ahead,” Steven said.

“Financial markets have experienced considerable turbulence, and financing conditions have become much more difficult, especially in Europe.”

“This, together with precautionary behaviour by firms and households, means that the likelihood of a further material slowing in global growth has increased.”

With regard to the local economy, Stevens said Australia’s terms of trade have now peaked and will decline somewhat in the near term, although they remain “very high”.

Aside from the mining industry, Stevens said certain mining-related services are enjoying “better than average conditions” but in other sectors, consumer caution has had a dampening effect.

“The reduction in the cash rate, as a result of the board’s previous decision, flowed through to lending rates, which are now around their average level of the past 15 years,” Stevens said.

“Short-term market interest rates have tended to decline a little further in recent weeks, though term funding conditions for financial institutions have become more difficult.”

“Credit growth remains subdued and asset prices have declined further over recent months. The exchange rate has been quite variable over the past few months, but remains… historically high.”

“Overall the board concluded, on the basis of all the available information, that the inflation outlook afforded scope for a modest reduction in the cash rate.”

Financial comparison site RateCity welcomed the RBA’s decision to cut interest rates, labeling the move an “early Christmas present”.

According to RateCity chief executive Damian Smith, the cut will bring some extra income and options to around 2.5 million Australians with variable rate home loans this Christmas.

“The Reserve Bank board has given Australians a good reason to celebrate this month, potentially shaving another $50 off monthly repayments on the average home loan,” he says.

Meanwhile, the Australian Chamber of Commerce and Industry has already turned its attention to the banks, urging them to pass on today’s rate cut to business customers as soon as possible.

“Last month the major banks took up to two weeks to react and even then not all of the banks passed on the full amount,” ACCI director of economics and industry policy Greg Evans says.

“The rate cut will help rebuild flagging confidence – it’s particularly beneficial to small business.”

“It’s not just about the variable home loan. Business overdrafts and other lending products, such as fully drawn advances, also need to be adjusted by the full amount of the official easing.”