RBA pulls rate trigger with cut

Adam Smith 3 May 2016

RBA cash rate march 2016The Reserve Bank's surprise cut could pressure lenders to pass on savings to consumers.

The Reserve Bank has bucked economists’ expectations today by dealing a 0.25% rate cut.

At its board meeting today, the RBA chose to trim the official cash rate to 1.75%, a move that followed 11 consecutive months of unchanging rates.

The rate cut went contrary to experts’ forecasts for a continuing period of stability from the Reserve Bank. Ninety-six per cent of the experts surveyed in finder.com.au’s monthly Reserve Bank Survey predicted the bank would leave rates on hold, citing strong employment figures and a “wait and see” approach to the looming Federal budget.

Only one expert surveyed correctly predicted the RBA’s move. CommSec’s Savanth Sebastian said the bank expected the RBA to cut the cash rate in light of weak inflation figures, though he conceded there was still an argument for leaving rates untouched.

“While we don’t think there is a screaming need for interest rates to be cut on economic activity grounds, the low inflation result opens the door for the Reserve Bank to cut rates if they deem it necessary,” Sebastian said.

Sebastian said the RBA faced a similar challenge to other central banks around the world in addressing lower-than-expected inflation.

“The bottom line is that underlying inflation is undershooting the 2-3% target band and that suggests little risk in cutting rates a little further,” Sebastian said.

The downward move by the Reserve Bank could put pressure on lenders who issued out-of-cycle rate hikes to pass on the cut to customers. finder.com.au is maintaining a complete list of banks passing on the cuts.

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