The Reserve Bank of Australia on Tuesday cut the cash rate to a new record low of 2 per cent, citing some ongoing economic weakness for its decision.
The widely-expected quarter-point reduction, the second in three months, takes lending rates to the lowest point since at least the late 1950s.
The Australian dollar immediately reacted, plunging more than US0.70¢ to US77.88¢.
However, it quickly recovered to a new day’s high – of US79.05¢ – as details emerged on why the board voted to cut rates.
RBA governor Glenn Stevens said the decision came despite some “improved trends in household demand over the past six months and stronger growth in employment”.
However, he added: “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.”
The latest round of rate cuts, which began with February’s drop to 2.25 per cent, is aimed at spurring business investment outside mining and encouraging the so-called “animal spirits” which create jobs and drive innovation.
However, it could also further fan the flames of the hot Sydney property market and run the risk of creating a bubble.
According to RateCity.com, Tuesday’s cash rate cut will equate to home loan rates dipping below 4 per cent this month, the lowest on record.
Peter Arnold, banking analyst at RateCity.com, said typical borrowers would save around $1200 this year on their home loan repayments compared with what they paid the previous year. For a lot of people in the capital cities it will be around double that.
“It’s not just the RBA who’s been cutting rates; the lenders have been getting in on the action as well,” he said.
ANZ was the first of the major banks to announce its response to the Reserve Bank’s cut, saying it would lower its standard variable home loan rate by 0.25 percentage points, effective this Friday.
Tuesday’s cut comes just days ahead of the RBA’s quarterly statement on monetary policy, in which the bank will detail prevailing weaknesses in the Australian economy such as low commodity prices, the fall-off in capital investment, restraints on fiscal spending and relatively high unemployment.
The central bank’s language on Tuesday, however, appeared to suggest less of an easing bias, meaning this might be the last cut in the current cycle.
Mr Stevens said “the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand”.
“This is likely to be interpreted by markets as a sign that the RBA believes it is near the end of the easing cycle,” said Australia and New Zealand Banking group chief economist Warren Hogan.
Other commentators disagreed.