The Reserve Bank of Australia has cut interest rates to a historic low, moving its cash rate from 1.75 per cent to 1.5 per cent.
If fully passed on, the cut will bring the standard variable mortgage rate to 5.15 per cent and the standard discounted rate to 4.35 per cent, slicing $44 off the monthly cost of repaying a $300,000 mortgage.
Commonwealth Bank of Australia was the first bank to react to the RBA's move, reducing its standard variable interest rates for mortgages by 0.13 percentage points.
The statement announcing the cut referred to historically low inflation and excess capacity in the labour market.
The board believes that while business conditions are good and non-mining investment is growing in parts of the economy shielded from weak commodity prices, a further cut will boost the labour market and economic growth.
The historically low inflation rate of 1 per cent means rates can be cut without breaching the central bank's 2 to 3 per cent inflation target.
"Recent data suggest that overall growth is continuing at a moderate pace, despite a very large decline in business investment," RBA governor Glenn Stevens said in the statement.
"Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend. Labour market indicators continue to be somewhat mixed, but are consistent with a modest pace of expansion in employment in the near term."
Mr Stevens pointed to recent data showing inflation was at a 17-year low and would probably stay low for some time, while low interest rates were making banks more willing to lend money, which was helping the economy.
"The board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting," Mr Stevens said.
House prices had risen only modestly this year, Mr Stevens said, while a large supply of apartments were scheduled to become available over the next two years and lending for home buyers had slowed.
That meant there was less chance that lowering interest rates would create risks of the housing market getting out of control, he said.
Tuesday's board meeting was Mr Stevens' second last. He will be succeeded on September 18 by his deputy, Philip Lowe. He will have an opportunity to expand on the reasons for the cut on Friday in the quarterly statement on monetary policy and next Tuesday in his final address as governor to business economists in Sydney.
The Australian dollar is down half a per cent following the decision to 75.20 US cents.
Peter Arnold, data insights director at RateCity.com.au, said the cut meant mortgage rates were likely to hit new lows of less than 3.5 per cent, with rates of 4 per cent becoming the new norm.
"On average, today's cut will put an extra $45 a month back into the pockets of anyone with a variable home loan, or more than double that for those living in the cities of Sydney or Melbourne," he said.
"Most people will have no shortage of ways to spend this extra cash, but if you want to maximise your savings, one of the best places to put it is back into the mortgage," he said.
How much you'll save, if the banks pass on the full cut:
Mortgage saving per month
- $100,000 $15
- $300,000 $44
- $500,000 $74
- $1,000,000 $148
Assumes 25-year, 5.4% variable mortgage