Interest rates likely to keep falling

THE Reserve Bank is likely to keep slashing interest rate, economists say, after cutting its key rate by 75 basis points today.

Slashed ... the RBA has cut rates from 6 per cent to 5.25 per cent, with more cuts expected.

Interest rates likely to keep falling

HOME owners have plenty to cheer about after the Reserve Bank of Australia (RBA) slashed its key interest rate by three quarters of a percentage point.

The central bank's decision at today's monthly board meeting was larger than the half-point reduction economists had expected and takes the cash rate to its lowest level in five years at 5.25 per cent.

Economists doubt the central bank will stop there.

Its decision follows last month's whopping reduction of a full percentage point, underscoring the RBA's intent to stop the economy from being dragged into a global recession.

If the latest rate cut is passed on in full, a borrower with an average $300,000 mortgage could expect to save about $150 on monthly repayments.

However, Commonwealth Bank of Australia - the only bank to announce its rate decision so far - cut its standard variable home loan interest rate by just 58 basis points.

RBA governor Glenn Stevens painted a grim global scenario for today's decision, saying economic data continue to point to significant weakness in the major industrial economies, as well as further signs of a slowdown in China and other parts of the developing world.

He said recent reductions in Australian borrowing rates, the depreciation of the Australian dollar and the fiscal stimulus announced last month would work to assist growth in the period ahead.

"But deteriorating international conditions and falling commodity prices will have a dampening influence,'' Mr Stevens said in a statement.

"On balance, it appears likely that spending and activity will be weaker than earlier expected.''

Federal Treasurer Wayne Swan said Australia was not immune from dramatically changing international events.

"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,'' Mr Swan told reporters in Canberra.

Business, builders and retailers welcomed the rate decision coming on top of the government's $10.4 billion economic stimulus package, which gives one-off payments to pensioners and low-income families as well as bigger grants to first home owners.

Opposition Leader Malcolm Turnbull welcomed the rate cut but said retail banks should be passing on the cut in full.

"The banks have been receiving a lot of support through guarantees from the government,'' Mr Turnbull told reporters in Sydney.

"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 homebuyers, by businesses large and small, unless they are passed on.''

However, CBA's Retail Banking Services Group executive Ross McEwan said there had been a significant increase in all three elements of its funding costs over recent weeks.

"Raising long-term funds remains extremely difficult and expensive,'' Mr McEwan said.

"Similarly, the cost of short-term onshore funding has increased in recent weeks, and we are also experiencing increased costs in retail deposits.''

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.

"The increasingly poor domestic data and unfolding global recession suggest that another cut is likely in December,'' Ms Ong said.

She now predicts a further cut of 50 basis points in December, bringing the date forward from February in her previous call.

The central bank board does not meet in January.