The Reserve Bank of Australia has decided to slash rates further by 25 basis points, pegging the country's benchmark rates at 4.25 percent to soften the blows of external factors led by the unresolved debt debacle in Europe and China's economic slowdown to the domestic economy.

The RBA's shift and easing of monetary policy would hopefully bolster the domestic economy as consumers will spend more and allow businesses to earn and create jobs. According to analysts, this compensate for the slowdown in the external trade of Australian goods to Europe, the U.S. and to the rest of the Asia Pacific Region.

In a statement, the RBA Board of Directors led by Governor Glenn Stevens had stated that the tight credit situation in financial markets here and abroad had been felt in the country's commodity prices--Australia's biggest export. Although, economic growth remains to be seen in the mining industry, other sectors have suffered especially in the retail and services sectors.

"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," he said.

According to RBA data, Australia's commodity price index preliminary estimates for November indicate it rose by 0.2 percent (on a monthly average basis) in SDR terms, after falling by 2.7 percent in October (revised). The price of gold increased, while there were declines in the estimated export prices of coking coal and iron ore, reflecting weaker spot prices and lower contract prices in the December quarter. In Australian dollar terms, the index was broadly unchanged in November.

He noted that the financial markets have continuously experience turbulence leading firms and households to be more cautious in investment and spending.

"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," he explained.

The RBA saw the country's economic fundamentals stabilizing more importantly the inflation has been kept at bay and labor market conditions softer. Thus, "the likelihood of a significant acceleration in labour costs outside the resources and related sectors in the near term has lessened. Accordingly, the Bank's current judgement is that inflation is likely to be consistent with the 2-3 per cent target in 2012 and 2013, abstracting from the impact of the carbon pricing scheme."

Housing, Commercial Property Markets

The Reserve Bank's decision to decrease rates by a total of 0.5 per cent in November and December is positive news for mortgage holders in the lead-up to Christmas.

"A second rate cut will assist those who are struggling with a mortgage but may also be the catalyst needed to encourage first home buyers to return to the market in the new year," said Ms Bennett.

The REIA is due to release the Deposit Power Housing Affordability Report tomorrow which is unlikely to show a great deal of improvement in the level of housing affordability in Australia.

"A further reduction in interest rates will assist in stimulating the lower end of the market and will make buying a home a more affordable option for young Australians," said Ms Bennett.

She noted that this is just one component of the solution to housing affordability as lower interest rates are needed to reduce the proportion of income that Australians are spending on loan repayments in an effort to improve the worsening affordability situation.

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