Historically Low Interest Rates Cut To New Historic Low

The Reserve Bank has cut interest rates to a record low of 1.25 percent, the first movement in nearly three years.

A softening labour market and a sluggish economy have sealed the deal.

"At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.25 per cent," Reserve Bank Governor Philip Lowe said in a statement on Tuesday.

"The Board took this decision to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target."

Lowe said the outlook for the economy remains reasonable, with increased investment in infrastructure set to help the Australian economy grow by around 2.75 percent in 2019 and 2020.

"Today's decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target," he added.

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ANZ was the first of the big four banks to reduce variable mortgage rates following the cut, but it will not pass on the full amount.

The lender said it would reduce its variable rates for owner-occupier and investor loans by 0.18 percentage points from June 14.

Treasurer Josh Frydenberg met with the CEOs of the big four banks to personally urge them to pass on the savings from a lower rate.

"My message to the banks is that, while they are critical pillars of the economy and especially at a time of domestic and international economic challenges, it was important to maintain the flow of credit to households and businesses," Frydenberg told The Australian on Tuesday.

"The public would rightly expect the benefit of any sustained reduction in funding costs passed on in full.”

Photo: Getty

Following ANZ's announcement, Frydenberg said the bank had "let down" its customers with its decision not to pass the cut on in full.

"This is deeply disappointing from the ANZ," he told reporters on Tuesday afternoon.

"We heard from commissioner Hayne just months ago that the banks were putting profits before people. Actions like this don't give the Australian people any comfort that the banks have changed their behaviour."

The Commonwealth Bank was next out of the gate, with a decision to pass the rate cut on in full to its customers from June 25.

If the retail banks do pass on the cut, borrowers with an average home loan of $400,000 would save roughly $58 on their monthly repayments.

Tuesday's decision could be just the start, with economists widely expecting a second cut by the end of 2019 as the central bank works to kickstart the nation's economy.

The RBA was expected to cut the cash rate in May but decided to hold off as it monitored the strength of the labour market.

Reserve Bank of Australia
Photo: Getty Images.

The unemployment rate didn't fall in the wake of the meeting, it rose in April to a worse-than-expected 5.2 percent.

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It was just one of the many factors, including below-expectation wage growth and a decline in business and personal lending, that applied pressure.

National accounts data -- a measure of the strength of the economy, to be released tomorrow -- is expected to show soft growth compared with the same period last year.

With AAP.