Sydney: 7 October 2008 The Reserve Bank of Australia today announced a 1 percent drop in official cash rates.

Reserve Bank Governor, Glenn Stevens, stated that the “movement as establishing a pattern for future decisions.” The RBA makes clear that the reason for the drop is because of the significant turn for the worse in international financial markets in September. In effect, the RBA is seeking to insulate Australia against the current turmoil and the drop must be viewed in that context.

“Large-scale financial failures in several major countries were accompanied by serious dislocation in interbank markets and heightened instability in other markets, including sharp falls in share prices. Official actions in a number of countries have been aimed at restoring stability, by adding to short-term liquidity and laying a foundation for longer-term recovery in the health of balance sheets. Nonetheless, financing is likely to be difficult around the world for some time ahead. This is also affecting Australia, albeit by less than in many other countries, given the relative strength of the local banking system.

Economic activity in the major countries is also weakening, and evidence is accumulating of a significant moderation in growth in Australia’s trading partners in Asia. The expansionary effects of the recent surge in Australia’s terms of trade are still coming through, but some decline in the terms of trade now looks likely over the coming year, with many commodity prices having declined from their peaks. This, combined with the likelihood of below-trend growth in the global economy, suggests that global inflation will moderate in 2009.”

The big question is, how much will the banks pass on?

More information:
Click here to go to the RBA media release