RBA cuts official interest rate to record low 3 per cent

TREASURER Wayne Swan maintains the "glass is more than half full" for Australia's economy after the Reserve Bank's decision to cut the official cash rate by 25 basis points to a record-equalling low of 3%.

The only other time the cash rate was that low was in late 2009 as Australia attempted to stave off a recession caused by the global financial crisis.

But Mr Swan said comparing the economic climate then to the prevailing conditions now was laughable.

"Anybody who thinks that rates are at their levels now for the same reason they were at lows during the global financial crisis simply can't be taken seriously when it comes to economic policy," Mr Swan said in an attempt to pre-empt the Coalition's reaction to the cash rate cut.

Unlike in 2009 growth was running at trend and the Australian dollar was about 40 cents lower than it is now, Mr Swan said.

He claimed a combination of good economic management, low inflation and unemployment had paved the way for the RBA to ease the cash rate.

And he urged people to ignore the "scare campaign" being fuelled by the opposition and sections of the media.

"The glass is more than half full. The problem we've got with Mr Abbott and the Liberals is they're running around saying ... the glass is half empty, and then going on to make even more extreme statements by smashing the glass on the floor," he said.

Mr Swan said people with a $300,000 mortgage were up to $5000 a year better off than in the final year of the Howard government in 2007.

He also made the point people who had been able to keep their payments at the same level since 2007 would pay off their mortgage about eight years faster.

But Mr Swan conceded the outlook was not all positive, citing the high Australian dollar and "strong economic headwinds" created by global uncertainty as challenges for the economy.

Shadow Treasurer Joe Hockey told reporters in Sydney Mr Swan "did not understand what was happening in the economy".

He said contrary to the Treasurer's claim, the RBA had cut the cash rate because of weakness in the Australian economy.

"Clearly the Reserve Bank is trying to catch a falling Australian economy," Mr Hockey said.

"The government has no plan to deal with the deterioration in the non-mining sector in the Australian economy."

He said the RBA was being left to do the heavy lifting.

In his statement RBA Governor Glenn Stevens said the continuing economic woes in Europe and the United States peering over the metaphorical "fiscal cliff were affecting sentiment in Australia.

Mr Stevens again highlighted the drop in commodity prices, and said inflation remained with the 2-3% target.

"While the full effects of earlier measures are yet to be observed, the board judged at today's meeting that a further easing in the stance of monetary policy was appropriate now," his statement read.

The RBA next will next meet in February.

Mark Todd from Fiig Securities told Sky Business problems overseas had driven the decision to cut.

He said while the Australian economy was performing well, the rest of the world remained weak and would likely remain so for some time.

For that reason he predicted a cash rate of 2% in Australia at some point in the next two years.

"It's not the fact that the RBA is saying these are historically low levels. They're saying relative to the rest of the world this is where we need to be," Mr Todd said.

"We can't stay at 3.25 when the rest of the world is at zero interest rates. And that will be zero interest rates for years to come.

"And so the RBA really needs to get its head around what the policy settings will be for the next year to two years.

"I think over time you will see something with a 2% handle on it because you simply can't have 3% over the prevailing cash rates ... at zero."

As in previous months the Bank of Queensland was the first to pass on the cut, albeit by only 20 basis points.

The big four banks were yet to make a decision.

Text of the RBA decision:

Global growth is forecast to be a little below average for a time. Risks to the outlook are still seen to be on the downside, largely as a result of the situation in Europe, though the uncertainty over the course of US fiscal policy is also weighing on sentiment at present. Recent data suggest that the US economy is recording moderate growth and that growth in China has stabilised. Around Asia generally, growth has been dampened by the more moderate Chinese expansion and the weakness in Europe.

Key commodity prices for Australia remain significantly lower than earlier in the year, though trends have been more mixed over the past few months. The terms of trade have declined by about 15 per cent since the peak, to a level that is still historically high.

Sentiment in financial markets remains better than it was in mid year, in response to signs of progress in addressing Europe's financial problems, though Europe is likely to remain a source of instability for some time. Long-term interest rates faced by highly rated sovereigns, including Australia, remain at exceptionally low levels. Capital markets remain open to corporations and well-rated banks, and Australian banks have had no difficulty accessing funding, including on an unsecured basis. Borrowing conditions for large corporations are similarly attractive and share prices have risen since mid year.

In Australia, most indicators available for this meeting suggest that growth has been running close to trend over the past year, led by very large increases in capital spending in the resources sector, while some other sectors have experienced weaker conditions. Looking ahead, recent data confirm that the peak in resource investment is approaching. As it does, there will be more scope for some other areas of demand to strengthen.

Private consumption spending is expected to grow, but a return to the very strong growth of some years ago is unlikely. Available information suggests that the near-term outlook for non-residential building investment, and investment generally outside the resources sector, remains relatively subdued. Public spending is forecast to be constrained. On the other hand, there are indications of a prospective improvement in dwelling investment, with dwelling prices moving a little higher, rental yields increasing and building approvals having turned up.

Inflation is consistent with the medium-term target, with underlying measures at around 2½ per cent. The introduction of the carbon price affected consumer prices in the September quarter, and there could be some further small effects over the next couple of quarters. Partly as a result of that, headline CPI inflation will rise above 3 per cent briefly. Looking further ahead, with the labour market softening somewhat and unemployment edging higher, conditions are working to contain pressure on labour costs. A continuation of moderate wage outcomes and improved productivity performance will be needed to keep inflation low, since the effects on prices of the earlier exchange rate appreciation are now waning. The Bank's assessment remains that inflation will be consistent with the target over the next one to two years.

Over the past year, monetary policy has become more accommodative. There are signs of easier conditions starting to have some of the expected effects, though the exchange rate remains higher than might have been expected, given the observed decline in export prices and the weaker global outlook. While the full effects of earlier measures are yet to be observed, the Board judged at today's meeting that a further easing in the stance of monetary policy was appropriate now. This will help to foster sustainable growth in demand and inflation outcomes consistent with the target over time.

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