By Claire Reilly

The Reserve Bank of Australia yesterday declared that the official cash rate would be lowered by 25 basis points to 4.25 per cent, effective as of today. In explaining the decision, Governor Glenn Stevens said that “changed behaviour by households and the high exchange rate have had a noticeable dampening effect” on the economy.

“Financial markets have experienced considerable turbulence, and financing conditions have become much more difficult, especially in Europe,” he said. “This, together with precautionary behaviour by firms and households, means that the likelihood of a further material slowing in global growth has increased.

“Commodity prices have reflected this, declining further over recent months and taking pressure off CPI inflation rates. This has increased the scope for some easing in monetary policy in a number of countries.

“Moreover, with labour market conditions now softer, the likelihood of a significant acceleration in labour costs outside the resources and related sectors in the near term has lessened. Accordingly, the Bank's current judgement is that inflation is likely to be consistent with the 2–3 per cent target in 2012 and 2013, abstracting from the impact of the carbon pricing scheme.

“Overall, the Board concluded, on the basis of all the available information, that the inflation outlook afforded scope for a modest reduction in the cash rate.

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The Australian Retail Association (ARA), which has long trumpeted the need for a reduction in rates to ease the burden on the retail industry, has welcomed the move.

“The RBA’s timely decision means the third of consumers who are starting their shopping during this first two weeks of December will have some extra spending confidence,” said ARA executive director, Russell Zimmerman.

“Retailers have been facing tough trading conditions over the past eighteen months, and the rate cut will give them hope the silly season is ‘in the bag’ and they will finally be able to post some growth over Christmas.

“It’s clear the RBA has listened to those at the coal face of the industry and given some much needed relief to consumers under stress as a result of their mortgage as well as other taxes and a soaring cost of living.

“The RBA has done its bit, showing Christmas spirit at retailers’ hour of need but it’s now up to the banks to show the same spirit and pass on the rate cut to both businesses and consumers.”

At this stage it seems the major banks have not heard Zimmerman’s impassioned plea, with the major banks yet to pass on the rate cut.