Rates cut to 4.25% as RBA tips further slowdown from European debt crisis

The Reserve Bank of Australia has cut rates for the second consecutive month, taking the official cash rate to 4.25%, tipping the European sovereign debt will cloud economic activity there “over the period ahead.”

The central bank said the European troubles, household and consumer caution and a fall in core inflation had “increased the scope for some easing in monetary policy.”

It also suggested that the inflation was “likely to be consistent with the 2-3% target in 2012 and 2013, abstracting from the impact of the carbon pricing scheme.” 

The 25 basis point cut was tipped by economists, with expectations heightened overnight by news that European nations had been placed on credit watch by ratings agency Standard & Poor’s. China last week recorded its first production slowdown in three years.

The fall is the second consecutive monthly reduction in three years, and prompted a dip in the Australian dollar to just over $US1.02.

The central bank cut rates to 4.5% last month, its first decrease in 2.5 years.

“The sovereign credit and banking problems in Europe, to which European government are still seeking to craft a full response, are likely to weigh on economic activity there over the period ahead,” RBA governor Glenn Stevens said in a statement. 

“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.”

“Commodity prices have reflected this, declining further over recent months and taking pressure off CPI inflation rates. This has increased the scope for some easing in monetary policy in a number of countries.”

The RBA said that overall, the board concluded that the inflation outlook “afforded scope for a modest reduction in the cash rate.”

“The Board will continue to set policy as needed to foster sustainable growth and low inflation over time.”

The reduction will be welcomed by retailers and property groups, which had been calling for another cut to boost demand.

Financial comparison site Canstar said the reduction would slice $48.64 off a $300,000 25-year home loan.

The Australian Chamber of Commerce and Industry, meanwhile, called on banks to speedily pass on the reduction to their business customers. The business group said it would boost sagging confidence, and particularly help small business.