Mortgage holders may be in for even more hip-pocket relief next month despite the Reserve Bank of Australia's surprise three-quarters of a percentage point raid on official interest rates yesterday.
A sharply slowing economy has financial markets expecting another cut to rates, of 50 basis points, despite yesterday's bigger than expected move to bring the official cash rate down to 5.25 per cent.
Yesterday's decision follows last month's rates reduction of a full percentage point, underscoring the Reserve's intent to stop the economy from being dragged into a global recession.
Rates have now tumbled 2 percentage points in three months to the lowest level in five years, in the most aggressive phase of interest rate cuts, in percentage terms, for 25 years.
Citing ''deteriorating international conditions and falling commodity prices'', Reserve Bank governor Glenn Stevens said in his statement that spending and economic activity would be weaker than expected, warranting a ''significant reduction'' in interest rates.
The Christmas shopping season is set to receive a shot in the arm, with home owners on a mortgage of $300,000 receiving a saving of $149 a month if banks pass on the cut in full.
But the Reserve's latest efforts to stimulate an economy suffering because of the global financial crisis may not be fully reflected in movements by the big banks.
The only bank to announce a follow-on rate cut yesterday was the Commonwealth, which said it would pass on 58 basis points of the 75-basis-point cut.
It cited a higher cost of funding in recent weeks as the reason for lowering the amount.
The Commonwealth's retail banking services group executive, Ross McEwan, said, ''Raising long-term funds remains extremely difficult and expensive.''
Treasurer Wayne Swan said yesterday the banks should pass on as much as they could of the official cut, adding the Reserve's decision reflected the deterioration in the international economy.
''What it now shows is that the Reserve Bank and the Government are working in tandem, working in tandem to strengthen our economy in the face of the global financial crisis,'' he said.
''We do have some underlying strengths but we are being buffeted significantly by these changed circumstances and it was recognised today by the Reserve Bank's decision.''
Reductions in Australian borrowing rates, the depreciation of the Australian dollar and last month's $10.4billion stimulus package would assist growth in the period ahead, he said.
''On balance, it appears likely that spending and activity will be weaker than earlier expected,'' Mr Swan said.
The Opposition welcomed the rate cut but said the banks must pass it on in full.
''We expect the banks to pass that rate cut on to their customers in full, they have the capacity to do so and they ought to do so,'' Opposition Leader Malcolm Turnbull said yesterday.
''The banks have been receiving a lot of support through guarantees from the Government.
''They are strong and profitable, and the benefit of these rate cuts and the stimulatory effect that these rate cuts are designed to have cannot be enjoyed by consumers, by home buyers, by businesses large and small, unless they are passed on.''
Yesterday's official rate cut came as an expectations survey by the Commonwealth Bank and the Australian Chamber of Commerce and Industry showed business conditions and expected economic performance at their lowest level since the survey began in 1994.
The Australian sharemarket rose on the immediate announcement of the rate cut, but wound back to close marginally down for the day on fears the Reserve's announcement reflected an underlying pessimism.
Economists predicted further rate cuts next month and next year with a softening of the economy.
Westpac chief economist Bill Evans said, ''We expect that the next move will be a 50-basis-point cut on December 2, laying the foundation for a low point of 4 per cent by March next year.''
The Australian Retailers Association hailed yesterday's move, saying it would buoy spirits for the Christmas shopping season.
The association's executive director, Richard Evans, said, ''This is good news for consumers struggling with limited discretionary spend and great news for retailers fraught with the lowest consumer sentiment since 1992.''The building industry said the rate cut would buttress falling house prices, but added a warning.
''[They] should act to shore up home-buyer confidence and put a floor under the weak housing market and weakening house prices,'' Master Builders Australia chief executive Wilhelm Harnish said.
RBC Capital Markets senior economist Su-Lin Ong said the reluctance by key lenders to fully pass on moves in the cash rate would keep the pressure on the RBA to cut further.
She now predicts a further cut of 50 basis points in December.