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The Reserve Bank of Australia (RBA) has cut its key interest rate for the third month in a row as it attempts to prevent Australia’s economy stalling. The central bank trimmed three-quarters of a percentage point – or 75 basis points – off its key cash rate, reducing it to 5.25%, the lowest level since December 2003.

For a typical 25-year, $250,000 home loan, today’s cut if passed on in full by lenders will save the borrower $112.63 a month in payments or some $33,791 over the life of the loan.The move, announced after today’s monthly board meeting by the RBA, exceeded economists’ predictions of a 50 basis-points cut. Today’s cut brings the RBA’s cuts to 2 percentage points since the central bank reversed course in September, retreating from a 12-year high rate of 7.25%.

The RBA will be hoping that the big commercial banks will repeat last month’s feat of passing on the entire official rate cut to borrowers. Lower lending costs help spur the economy by encouraging more individuals and businesses to purchase houses or make other investments, stoking demand that in turn prompts more orders.

Almost all the latest economic figures point to a sharp slowdown in demand as the effects of the global financial crisis spread to Australia. Falling commodity prices are already dimming the outlook for the mining and export sectors. Retail sales shrank 1.1% last month from September, the largest drop since April 2005, as consumers start to pull back on spending.

House prices, another measure of the economy’s health, fell 1.8% in the September quarter, the sharpest slowdown since the 1970s, according to some reports.

Housing is becoming more and more attractive as an asset class as the year progresses. Opportunistic investors are in for a feast – especially those from abroad in countries with exchange rate advantages (United States, United Kingdom and the countries of the European Union using the Euro) – exciting times!

Michael Marquette

The Commonwealth Bank increased its interest rates this week, thus becoming the third of Australia’s banks to do so.

The cost of a standard variable home loan offered by the CBA will rise with immediate effect by 0.14% to 9.58%.

The Commonwealth Bank’s move comes after St George and BankWest raised rates on their standard variable home rates, but ANZ, NAB and Westpac have still to make their move.

The Reserve Bank of Australia kept the official cash rate on hold at 7.25% at its meeting earlier this month having increased its cash rate by 50 basis points since the beginning of 2008, in an effort to cool the economy from inflationary pressures.

Australian banks have thus far added between 40 and 60 additional basis points to cover the higher cost of funds and, according to critics, recoup profits lost to non-bank mortgage lenders in recent years.

For those home loan borrowers that are paying more off their mortgage than required, this buffer means that slight increases make little impact. Those that are not in such a fortunate position will, of course, need to tighten their belts even further.

There are, however, some positive signs ahead. The price of oil has been retreating this week, Australian inflationary pressures are cooling, so there may be only a few interest rises to go before we experience the peak. And, with consumer confidence at the lowest since in 16 years when, as it happens, interest rates were 17%, we are unlikely to suffer the experiences of the early 1990’s.

Michael Marquette

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