The Reserve Bank is set to reduce interest rates by a further 0.50 percentage points within weeks after its most aggressive series of cuts since the 1991 recession.

Yesterday's surprise cut of 0.75 points — the third in three months — brings the total fall in the bank's cash rate since September to 2 percentage points, undoing almost five years of rises. If fully passed on, the recent cuts would bring the standard variable mortgage rate down from 9.6% to 7.6%, taking $400 a month off the cost of servicing a $300,000 loan.

A further cut expected in December would bring the total saving to $500.

Australia's biggest home lender, Commonwealth Bank, was the first of the big banks to change its rates in response to yesterday's move — but risked criticism for not passing on the full amount to its customers.

Announcing a cut of just 0.58 points, the Commonwealth blamed increases in funding costs for not fully passing on the Reserve's decision. The other big banks had not revealed their intentions by last night.

Treasurer Wayne Swan has previously warned the banks they would have some explaining to do if they did not pass on the cut in full — a sentiment shared yesterday by Opposition Leader Malcolm Turnbull.

"The banks have been receiving a lot of support through guarantees from the Government," Mr Turnbull said. "They are strong and profitable, and the benefit of these rate cuts, and the stimulatory effect that these rate cuts are designed to have, cannot be enjoyed by consumers, by home buyers, by businesses large and small, unless they are passed on."

But senior Commonwealth executive Ross McEwan said there had been an increase in all elements of its funding costs recently. "Raising long-term funds remains extremely difficult and expensive," Mr McEwan said. "Similarly, the cost of short-term onshore funding has increased in recent weeks, and we are also experiencing increased costs in retail deposits."

Yesterday's announcement by the Reserve came just a month after its surprise decision to cut rates by a full percentage point. But unlike last month, when the bank said it did not regard its decision "as establishing a pattern for future decisions", yesterday's announcement included no such caution.

Instead, the bank invited speculation about further cuts by saying it would "continue to monitor developments and make adjustments as needed to promote sustainable growth".

Mr Swan said the Reserve took the action to protect families and businesses from an "ugly" global financial crisis. "The statement from the Reserve underscores the extent to which that global crisis is impacting now on this country.

We are certainly not immune," he said. Mr Swan will this week release the Government's Mid-Year Economic and Financial Review, which is expected to forecast that the crisis will cut corporate tax and capital gains tax revenue by as much as $10 billion a year, wiping out much of the budget surplus.

The Treasurer said that the $10.4 billion fiscal stimulus package due to be distributed from December and the 2 percentage-point rate cut showed fiscal policy and monetary policy working in tandem to prevent a recession.

"I do expect to see positive growth, and when the outlook is published you will see the Government's forecast," he said.

The Reserve statement painted a picture of an economy in decline, saying that spending and activity would be "weaker than earlier expected" as a result of deteriorating international conditions. Growth in Australia's key market of China was slowing, contributing to further falls in world commodity prices.

"The thing that struck me the most about the Reserve Bank's statement was the absence of any moderating commentary," said ICAP Securities economist Adam Carr.

"The bank is clearly very worried by the global economic backdrop and the impact it will have domestically."

The Commonwealth Bank Chamber of Commerce quarterly survey released before the rate decision showed business confidence at its lowest ebb since the survey began in the early 1990s. The index of current conditions fell to 41.1 from 60.9 a year before.

News of the bigger-than-expected rate cut provided a boost to the sharemarket, with the main indices finishing almost level after being down as much as 1% in earlier trade.

But the dollar dived from US67.2 cents to US66 cents before steadying at US66.30.

Forecasters from JP Morgan, Citibank, UBS and TD Securities all expect a further cut of 0.50 points when the bank board next meets on December 2.

And most expect further cuts totalling 0.75 points beyond that, bringing the cash rate down from today's 5.25% to a historic low of 4% next year.

Commsec economist Craig James raised concern that the bank might be easing too quickly, saying the residential property market "could quickly build up a head of steam".

"Not only is population growth the fastest in 20 years but the rental market is super-tight and there's an under-supply of new homes," he said.

Author: Peter Martin
Date: November 5, 2008
Publication:  The Age (subscribe)