Federal Treasurer Wayne Swan said the decision would give Australians confidence that the Reserve Bank had further room to move on rates given the Government’s plan to return the budget to surplus next year.
In a statement, Reserve Bank Governor Glenn Stevens said the board noted that households and businesses were still cautious, and this was likely to remain the case despite a slight improvement in the jobs market.
Mr Stevens said that inflation was likely to remain low in the short term, although the recent weakening of the Australian dollar meant that growth in domestic prices would have to slow for this to remain the case in the longer term, as prices for imported products rose.
“At today’s meeting, the board judged that with modest domestic growth and a weaker and more uncertain international environment, the outlook for inflation afforded scope for a more accommodative stance of monetary policy,” Mr Stevens said.
On the global economy, the central bank pointed out that there had been further weakening in Europe and slowing of growth in China.
The board also took note of the erosion of sentiment on financial markets in the last month.
But Mr Swan said Australians could be confident about the future, given the economy’s strong fundamentals.
And he repeated his call for commercial banks to pass the full amount of the rate cut on to borrowers.
“The banks are very profitable, their net interest margins are around the levels that they were prior to the global financial crisis, so I think that their customers will not treat them kindly if they do not pass this through in full,” Mr Swan said.
Federal Opposition Leader Tony Abbott said it was hardly surprising that the Reserve Bank would cut rates this month.
He said the decision reflected weak economic conditions, not strong economic management by the Government.
“International economic circumstances are fragile, to put it at its best, the economic storm clouds have rarely been more dark,” Mr Abbott said.
“Here in Australia, economic conditions are soft – the stock market is down, profits are weak, retail sales are weak, the property market is down.
“Under these circumstances, it’s hardly surprising that the Reserve should have reduced the rate by 25 basis points.”
Regional lender Bank of Queensland was the first bank to move after the RBA decision, announcing it would slice 20 basis points from its standard variable mortgage and business rates from June 16.
Bank of Queensland chief executive Stuart Grimshaw said the bank decided to pass on much of the RBA’s cut because global economic uncertainty had shaken households.
“Competition for deposits is at an all-time high, but the RBA is trying to encourage consumers to spend,” Mr Grimshaw said.
Last month, the RBA slashed the cash rate by 50 basis points, and economists had been divided about whether the bank would cut rates again today, and if so, by how much.
Some had anticipated another cut of 50 points, given the deterioration in global economic conditions in the last month and persistent low inflation.
But Mr Stevens said today that interest rates for borrowers were already below their medium-term average after last month’s rate cut.
The Australian dollar fell after the rate cut was announced but has since rebounded and at 4:15pm (AEST) it was worth 98 US cents.
The board next meets on July 3.
Stephen Koukoulas, the managing director of Market Economics, thinks rates could be cut again.
“I still think there’s room for interest rates to move quite substantially lower in the next six months or so,” he told PM.
“The global economy still looks extremely fragile to me.”
Alan Oster, the chief economist of the National Australia Bank, agrees.
“I think they’ve probably got another 25 to 50 basis points,” he said.
“I suspect they will probably wait until you get the next CPI so that would probably put you into August and then potentially you might get another one maybe in September.”