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RBA cuts interest rates to record low of two per cent

Today’s RBA decision to cut interest rates to a record low of two per cent was in line with the expectations of several top economists.

Twelve out of the 15 economists surveyed by AAP last week expected the RBA to cut the cash rate, after the bank made a similar reduction in February.

They also believe the interest rate won't go any further below two per cent for the foreseeable future.

Read more: What to do when interest rates change

Also read: What is my house worth?

BUDGET 2015: Everything you need to know


AUSTRALIAN DOLLAR

The Australian dollar was slightly higher following a quiet night of trade ahead of the Reserve Bank of Australia's interest rate decision.

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At 0700 AEST on Tuesday, the local unit was trading at 78.37 US cents, up from 78.28 cents on Monday.

Australian dollar mid-morning. Image: Yahoo7 Finance.

National Australia Bank economist David de Garis said trade in most most currencies was subdued overnight with very little economic data to drive movements.

"A night of recent ranges as far as the major currencies was the order of the overnight session, the Australian dollar was marking time ahead of the RBA decision today at 2.30pm," he said.

"The market closed yesterday with 75 per cent priced for an easing today so the price risk would be more on the upside of yields and the Australian dollar in the event the RBA holds fire."

Before the RBA announcement the Australian Industry Group releases its Performance of Services Index (PSI) for April and the Dun and Bradstreet business expectations survey is due out.

Convert: AUD to USD

Also read: Seven ways to take advantage of the rate cut


HOUSE PRICES UP… EXCEPT IN ONE CAPITAL CITY

Australian property prices rose in April, with Hobart and Adelaide outpacing increases in the bigger capital cities.

Home values in Australia's capital cities were up 0.8 per cent, easing from March's 1.4 per cent rise, the CoreLogic RP Data home value index out Friday showed.

Prices in Hobart and Adelaide were both up 1.6 per cent, followed by Sydney, where prices rose by one per cent.

RATE CUT: The impact of borrowers in each state:

Table of home loan repayments for next 12 months from May 1, onwards. Source: RateCity.Source: RateCity.

Sydney still recorded the biggest jump year-on-year, with a massive 14.5 per cent surge.

Canberra was the only capital city where prices fell last month, dropping 1.5 per cent.

RP Data head of research Tim Lawless said some markets were starting to slow, despite the positive overall picture.

"While the headline growth figures remain strong it is clear that some markets are winding down," Mr Lawless said.

Following today’s decision by the RBA to cut rates to a new historical low of 2 per cent, variable rates are set to push below the 4 per cent mark for the first time on record.

According to RateCity:

- This represents a saving of around $1200 this year for typical home borrowers

- Most competitive variable rates are set to push from 4.19 per cent to 3.94 per cent in May

Compare: home loan rates

First home buyers buying big despite prices


INFLATION FIGURES BELOW RBA TARGET

The annual rate of inflation at 1.4 per cent left the door wide open for a rate cut, with figures well below the Reserve Bank's two to three per cent target.

It is now the fifth consecutive month that inflation is below two per cent.

Consumer prices were up 0.3 per cent in April, following a 0.4 rise in March, according to the TD Securities/Melbourne Institute monthly inflation gauge.

TD head of Asia Pacific research Annette Beacher said the differences between the solid monthly rise and weak annual rate can be explained by inflation being quite buoyant this time last year, so it was rising from a low base.

The combination of sub-trend GDP growth, lower terms of trade and a low inflation environment all tilted the odds towards the RBA delivering a 25 basis point cut to two per cent, Beacher said.

Also read: How and why to start investing in shares


BUDGET FEARS DENT CONSUMER CONFIDENCE

Consumer confidence fell last week largely due to concerns about next week's federal budget and the state of the government's finances.

Confidence was down 2.8 per cent, completely reversing the previous week's 2.8 jump, ANZ/Roy Morgan's consumer confidence barometer found.

Despite the drop off, ANZ chief economist Warren Hogan on Tuesday said consumers seemed less worried about this year's federal budget than they did in the lead up to the 2014 budget.

"While confidence fell sharply in the weeks ahead of last year's budget, this year we are seeing a more modest decline," he said.

Also read: A new and improved budget coming to a country near you


JOB SURGE: ADS UP 7.3 PER CENT ON A YEAR AGO

Despite a surge in job advertisements in April, economists were right in believing it was not enough to keep the RBA from trimming the official cash rate.

Job ad numbers rebounded 2.3 per cent to 144,559 last month after falling 1.3 per cent in March, according to ANZ's monthly job advertisement series.

While newspaper ads fell 2.5 per cent, this was offset by the far greater number of internet ads, which rose 2.4 per cent.
Job ads are now up 7.3 per cent on a year ago, the ANZ data shows.

Prior to the RBA announcement, CommSec chief economist Craig James said that while more job ads indicated a strengthening labour market, he still tipped the RBA to cut rates.

"It is good news that businesses are looking to hire staff. And it is good news that building activity is set to rise further in coming months," Mr James said.

"But with inflation well contained, the Reserve Bank can give the economy a helping hand with another ... interest rate cut."

ANZ chief economist Warren Hogan said a poor outlook for non-mining investment as well as weak consumer and business confidence would outweigh the upbeat jobs news.


‘MORE THAN A RATE CUT NEEDED TO LIFT BUSINESS CONFIDENCE’

It will take more than just a interest rate cut to lift confidence - the federal government has to come up with a solid budget plan as well.

That was the view of Australian Chamber of Commerce and Industry chief Kate Carnell ahead of Tuesday's Reserve Bank board meeting.

If banks follow such a cut in full, it will save people with an average mortgage of $300,000 around $45 on their monthly repayments.
"Any reduction is welcome, there's no doubt, but without a solid plan in the budget, business confidence, consumer confidence won't track up," Ms Carnell told reporters in Canberra.

Could tax cuts solve our economic problems?

BUDGET 2015 hub: Everything you need to know in one spot


She was releasing the chamber's latest business expectations survey for the March quarter.

It found firms with a fairly grim outlook for the economy over the next 12 months, as well as predicting falls in a range of indicators, including profits, employment, and investment.

Ms Carnell said the result were "deeply concerning", but the May 12 budget does give the government the opportunity to restore confidence with a solid plan.

She said new budget forecasts by Deloitte Access Economics showing a hefty deterioration in budget deficits across the forward estimates shows that "business as usual is not good enough"




Statement by Glenn Stevens, RBA Governor

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 2.0 per cent, effective 6 May 2015.

The global economy is expanding at a moderate pace, but commodity prices have declined over the past year, in some cases sharply.

These trends appear largely to reflect increased supply, including from Australia. Australia's terms of trade are falling nonetheless.

The Federal Reserve is expected to start increasing its policy rate later this year, but some other major central banks are stepping up the pace of unconventional policy measures.

Hence, financial conditions remain very accommodative globally, with long-term borrowing rates for sovereigns and creditworthy private borrowers remarkably low.

In Australia, the available information suggests improved trends in household demand over the past six months and stronger growth in employment.

Looking ahead, the key drag on private demand is likely to be weakness in business capital expenditure in both the mining and non-mining sectors over the coming year.

Public spending is also scheduled to be subdued. The economy is therefore likely to be operating with a degree of spare capacity for some time yet.

Inflation is forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.

Low interest rates are acting to support borrowing and spending, and credit is recording moderate growth overall, with stronger lending to businesses of late. Growth in lending to the housing market has been steady over recent months.

Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The Bank is working with other regulators to assess and contain risks that may arise from the housing market.

In other asset markets, prices for equities and commercial property have been supported by lower long-term interest rates.

The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies.

Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.

At today's meeting, the Board judged that the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand.