Reserve Bank of Australia Cuts Interest Rates to 2.5%, Australian Dollar Jumps After Rate Cut

The Reserve Bank of Australia has cut interest rates to a record low of 2.5 per cent during its board meeting for the month of August.

The latest interest rate cut is the first since the Reserve Bank has declared a 25-point cut in May 2013 when the Australian dollar was above parity with the U.S. dollar. This is also the second time interest rates have been cut in an ongoing election campaign.

Economists had previously predicted that the declining Australian dollar would push the Reserve Bank of Australia to cut interest rates further. The Australian dollar is now trading below 90 U.S. cents. Reduced job ads and flat retail spending figures also contributed to RBA's case to cut rates.

Shadow Treasurer Joe Hockey said the latest cut by the Reserve Bank only showed that the Labor-led government has lost control of the Australian economy. Mr. Hockey said average interest rates should be lower but if interest rates were cut even further, it is a sign that Australia has a struggling economy.

Mr. Hockey criticised Prime Minister Kevin Rudd for not understanding economics. He said Treasurer Chris Bowen doesn't understand economic challenges that may come in the future.

If the rate cut is passed on to consumers in full, a 0.25 percentage point rate cut would mean a repayment reprieve of $44 per month to a customer with a variable rate home loan with a $300,000 mortgage and interest rate of 5.64 per cent.

Since late 2012, the Reserve Bank of Australia has cut interest rates three times. The RBA has recently observed a subdued inflation outlook in Australia, giving it room to ease monetary policy if it was necessary.

Reserve Bank of Australia Governor Glenn Stevens said that the RBA has considered recent economic activity and prices. The board had concluded a further decline in interest rates would only be appropriate.

Mr. Stevens said the board will continue to evaluate the economic outlook and adjust policy when necessary. This will help promote sustainable growth and consistent inflation outcomes. Growth was below the trend, but Mr. Stevens said there was a good chance it will improve in 2014.

The Australian dollar has dropped 15 per cent since April 2013. However, the RBA governor said it was still quite high. The Aussie dollar traded at 89.51 U.S. cents from 89.23 U.S. cents after RBA's rate cut announcement.