In a move that was widely anticipated by the financial markets, the Reserve bank of Australia has today dropped interest rates with a decrease of 25bps that will bring the official cash rate down to 3.50%.
As a result of this move the currency markets have reacted accordingly with the Australian Dollar trading at $0.9771 and the stock market has risen strongly by 1% to 4075.
The last two rate cuts are virtually an admission by the RBA that they got it wrong last year when they didn’t cut rates. The next big question will be by how much the banks pass on the rate cut to their customers. Last month we saw the banks retain some of the rate cut citing increasing costs in wholesale funding as the culprit.